1
G.R. No. 122452 January 29, 2001
TAM WING TAK, petitioner,
vs.
HON. RAMON P. MAKASIAR (in his Capacity as Presiding Judge of the Regional Trial Court of Manila, Branch 35) and ZENON
DE GUIA (in his capacity as Chief State Prosecutor), respondents.
QUISUMBING, J.:
This is a petition for review on certiorari of the decision of the Regional Trial Court of Manila, Branch 35, dated September 14,
1995, which dismissed herein petitioner's special civil action for mandamus and sustained the Letter-Order of respondent
Chief State Prosecutor. The latter dismissed petitioner's appeal from the resolution of the City Prosecutor of Quezon City,
which, in turn, dismissed petitioner's complaint against Vic Ang Siong for violation of the Bouncing Checks Law or B.P. Blg. 22.
The factual background of this case is as follows:
On November 11, 1992, petitioner, in his capacity as director of Concord-World Properties, Inc., (Concord for brevity), a
domestic corporation, filed an affidavit-complaint with the Quezon City Prosecutor's Office, charging Vic Ang Siong with
violation of B.P. Blg. 22. Docketed by the Prosecutor as I.S. No. 93-15886, the complaint alleged that a check for the amount
of P83,550,000.00, issued by Vic Ang Siong in favor of Concord, was dishonored when presented for encashment.
Vic Ang Siong sought the dismissal of the case on two grounds: First, that petitioner had no authority to file the case on
behalf of Concord, the payee of the dishonored check, since the firm's board of directors had not empowered him to act on
its behalf. Second, he and Concord had already agreed to amicably settle the issue after he made a partial payment of
P19,000,000.00 on the dishonored check.
On March 23, 1994, the City Prosecutor dismissed I.S. No. 93-15886 on the following grounds: (1) that petitioner lacked the
requisite authority to initiate the criminal complaint for and on Concord's behalf; and (2) that Concord and Vic Ang Siong had
already agreed upon the payment of the latter's balance on the dishonored check.
A copy of the City Prosecutor's resolution was sent by registered mail to petitioner in the address he indicated in his
complaint-affidavit. Notwithstanding that petitioner was represented by counsel, the latter was not furnished a copy of the
resolution.
On June 27, 1994, petitioner's counsel was able to secure a copy of the resolution dismissing I.S. No. 93-15886. Counting his
15-day appeal period from said date, petitioner moved for reconsideration on July 7, 1994.
On October 21, 1994, the City Prosecutor denied petitioner's motion for reconsideration. Petitioner's counsel received a copy
of the denial order on November 3, 1994.
On November 7, 1994, petitioner's lawyer filed a motion to extend the period to appeal by an additional 15 days counted
from November 3, 1994 with the Chief State Prosecutor. He manifested that it would take time to communicate with
petitioner who is a Hong Kong resident and enable the latter to verify the appeal as procedurally required.
On November 8, 1994, petitioner appealed the dismissal of his complaint by the City Prosecutor to the Chief State
Prosecutor. The appeal was signed by petitioner's attorney only and was not verified by petitioner until November 23, 1994.
On December 8, 1994, the Chief State Prosecutor dismissed the appeal for having been filed out of time. Petitioner's lawyer
received a copy of the letter-resolution dismissing the appeal on January 20, 1995.
On January 30, 1995, petitioner moved for reconsideration.
On March 9, 1995, respondent Chief State Prosecutor denied the motion for reconsideration.
Petitioner then filed Civil Case No. 95-74394 for mandamus with the Regional Trial Court of Quezon City to compel the Chief
State Prosecutor to file or cause the filing of an information charging Vic Ang Siong with violation of B.P. Blg. 22.
On September 14, 1995, the trial court disposed of the action as follows:
WHEREFORE, for utter lack of merit, the petition for mandamus of petitioner is DENIED and DISMISSED.
SO ORDERED.1
Petitioner moved for reconsideration, but the trial court denied this motion in its order dated October 24, 1995.
Hence, the instant petition.
Before this Court, petitioner claims respondent judge committed grave errors of law in sustaining respondent Chief State
Prosecutor whose action flagrantly contravenes: (1) the established rule on service of pleadings and orders upon parties
represented by counsel; (b) the basic principle that except in private crimes, any competent person may initiate a criminal
case; and (3) the B.P. Blg. 22 requirement that arrangement for full payment of a bounced check must be made by the drawer
with the drawee within five (5) banking days from notification of the check's dishonor.2
We find pertinent for our resolution the following issues:
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(1) Was there valid service of the City Prosecutor's resolution upon petitioner?
(2) Will mandamus lie to compel the City Prosecutor to file the necessary information in court?
In upholding respondent Chief State Prosecutor, the court a quo held:
It is generally accepted principle in the service of orders, resolutions, processes and other papers to serve them on the party
or his counsel, either in his office, if known, or else in the residence, also if known. As the party or his counsel is not expected
to be present at all times in his office or residence, service is allowed to be made with a person in charge of the office, or with
a person of sufficient discretion to receive the same in the residence.
In the case under consideration, it is not disputed that the controverted Resolution dismissing the complaint of the petitioner
against Vic Ang Siong was served on the former by registered mail and was actually delivered by the postmaster on April 9,
1994 at said petitioner's given address in the record at No. 5 Kayumanggi Street, West Triangle, Quezon City. The registered
mail was in fact received by S. Ferraro. The service then was complete and the period for filing a motion for reconsideration
or appeal began to toll from that date. It expired on April 24, 1994. Considering that his motion for reconsideration was filed
only on July 7, 1994, the same was filed beyond the prescribed period, thereby precluding further appeal to the Office of the
respondent.3
Petitioner, before us, submits that there is no such "generally accepted practice" which gives a tribunal the option of serving
pleadings, orders, resolutions, and other papers to either the opposing party himself or his counsel. Petitioner insists that the
fundamental rule in this jurisdiction is that if a party appears by counsel, then service can only be validly made upon counsel
and service upon the party himself becomes invalid and without effect. Petitioner relies upon Rule 13, Section 2 of the Rules
of Court4 and our ruling in J.M. Javier Logging Corp. v. Mardo, 24 SCRA 776 (1968) to support his stand. In the J.M. Javier
case, we held:
[W]here a party appears by attorney, notice to the former is not a notice in law, unless service upon the party himself is
ordered by the court…5
The Solicitor General, for respondents, contends that the applicable rule on service in the present case is Section 2 of the
Department of Justice (DOJ) Order No. 223,6 which allows service to be made upon either party or his counsel. Respondents
argue that while a preliminary investigation has been considered as partaking of the nature of a judicial proceeding,7
nonetheless, it is not a court proceeding and hence, falls outside of the ambit of the Rules of Court.
We agree with petitioner that there is no "generally accepted practice" in the service of orders, resolutions, and processes,
which allows service upon either the litigant or his lawyer. As a rule, notice or service made upon a party who is represented
by counsel is a nullity,8 However, said rule admits of exceptions, as when the court or tribunal order service upon the party9
or when the technical defect is waived.10
To resolve the issue on validity of service, we must make a determination as to which is the applicable rule – the on service in
the Rules of Court, as petitioner insists or the rule on service in DOJ Order No. 223?
The Rules of Court were promulgated by this Court pursuant to Section 13, Article VII of the 1935 Constitution11 (now
Section 5 [5], Article VIII of the Constitution)12 to govern "pleadings, practice and procedure in all courts of the Philippines."
The purpose of the Rules is clear and does not need any interpretation. The Rules were meant to govern court (stress
supplied) procedures and pleadings. As correctly pointed out by the Solicitor General, a preliminary investigation,
notwithstanding its judicial nature, is not a court proceeding. The holding of a preliminary investigation is a function of the
Executive Department and not of the Judiciary.13 Thus, the rule on service provided for in the Rules of Court cannot be made
to apply to the service of resolutions by public prosecutors, especially as the agency concerned, in this case, the Department
of Justice, has its own procedural rules governing said service.
A plain reading of Section 2 of DOJ Order No. 223 clearly shows that in preliminary investigation, service can be made upon
the party himself or through his counsel. It must be assumed that when the Justice Department crafted the said section, it
was done with knowledge of the pertinent rule in the Rules of Court and of jurisprudence interpreting it. The DOJ could have
just adopted the rule on service provided for in the Rules of Court, but did not. Instead, it opted to word Section 2 of DOJ
Order No. 223 in such a way as to leave no doubt that in preliminary investigations, service of resolutions of public
prosecutors could be made upon either the party or his counsel.
Moreover, the Constitution provides that "Rules of procedure of special courts and quasi-judicial bodies shall remain effective
unless disapproved by the Supreme Court."14 There is naught in the records to show that we have disapproved and nullified
Section 2 of DOJ Order No. 223 and since its validity is not an issue in the instant case, we shall refrain from ruling upon its
validity.
We hold that there was valid service upon petitioner pursuant to Section 2 of DOJ Order No. 223.
On the issue of whether mandamus will lie. In general, mandamus may be resorted to only where one's right is founded
clearly in law and not when it is doubtful.15 The exception is to be found in criminal cases where mandamus is available to
compel the performance by the public prosecutor of an ostensibly discretionary function, where by reason of grave abuse of
discretion on his part, he willfully refuses to perform a duty mandated by law.16 Thus, mandamus may issue to compel a
prosecutor to file an information when he refused to do so in spite of the prima facie evidence of guilt.17
Petitioner takes the stance that it was grave abuse for discretion on the part of respondent Chief State Prosecutor to sustain
the dismissal of I.S. No. 93-15886 on the grounds that: (1) Vic Ang Siong's obligation which gave rise to the bounced check
had already been extinguished by partial payment and agreement to amicably settle balance, and (2) petitioner had no
standing to file the criminal complaint since he was neither the payee nor holder of the bad check. Petitioner opines that
neither ground justifies dismissal of his complaint.
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Petitioner's stand is unavailing. Respondent Chief State Prosecutor in refusing to order the filing of an information for
violation of B.P. Blg. 22 against Vic Ang Siong did not act without or in excess of jurisdiction or with grave abuse of discretion.
First, with respect to the agreement between Concord and Victor Ang Siong to amicably settle their difference, we find this
resort to an alternative dispute settlement mechanism as not contrary to law, public policy, or public order. Efforts of parties
to solve their disputes outside of the courts are looked on with favor, in view of the clogged dockets of the judiciary.
Second, it is not disputed in the instant case that Concord, a domestic corporation, was the payee of the bum check, not
petitioner. Therefore, it is Concord, as payee of the bounced check, which is the injured party. Since petitioner was neither a
payee nor a holder of the bad check, he had neither the personality to sue nor a cause of action against Vic Ang Siong. Under
Section 36 of the Corporation Code18, read in relation to Section 23,19 it is clear that where a corporation is an injured party,
its power to sue is lodged with its board of directors or turstees.20 Note that petitioner failed to show any proof that he was
authorized or deputized or granted specific powers by Concord's board of director to sue Victor And Siong for and on behalf
of the firm. Clearly, petitioner as a minority stockholder and member of the board of directors had no such power or
authority to sue on Concord's behalf. Nor can we uphold his act as a derivative suit. For a derivative suit to prosper, it is
required that the minority stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing
on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated who may wish to join
him in the suit.21 There is no showing that petitioner has complied with the foregoing requisites. It is obvious that petitioner
has not shown any clear legal right which would warrant the overturning of the decision of public respondents to dismiss the
complaint against Vic Ang Siong. A public prosecutor, by the nature of his office, is under no compulsion to file a criminal
information where no clear legal justification has been shown, and no sufficient evidence of guilt nor prima facie case has
been presented by the petitioner.22 No reversible error may be attributed to the court a quo when it dismissed petitioner's
special civil action for mandamus.
WHEREFORE, the instant petition is DISMISSED for lack of merit. Costs against petitioner.
SO ORDERED.
Bellosillo, Mendoza, Buena, and De Leon, Jr., JJ., concur.
Footnotes:
G.R. No. L-15092 May 18, 1962
ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,
vs.
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.
Tañada, Teehankee and Carreon for plaintiffs-appellants.
Hilado and Hilado for defendant-appellee.
REYES, J.B.L., J.:
Appeal on points of law from a judgment of the Court of First Instance of Occidental Negros, in its Civil Case No.
2603, dismissing plaintiff's complaint that sought to compel the defendant Milling Company to increase plaintiff's
share in the sugar produced from their cane, from 60% to 62.33%, starting from the 1951-1952 crop
year.1äwphï1.ñët
It is undisputed that plaintiffs-appellants, Alfredo Montelibano, Alejandro Montelibano, and the Limited co-
partnership Gonzaga and Company, had been and are sugar planters adhered to the defendant-appellee's sugar
central mill under identical milling contracts. Originally executed in 1919, said contracts were stipulated to be in
force for 30 years starting with the 1920-21 crop, and provided that the resulting product should be divided in the
ratio of 45% for the mill and 55% for the planters. Sometime in 1936, it was proposed to execute amended milling
contracts, increasing the planters' share to 60% of the manufactured sugar and resulting molasses, besides other
concessions, but extending the operation of the milling contract from the original 30 years to 45 years. To this
effect, a printed Amended Milling Contract form was drawn up. On August 20, 1936, the Board of Directors of the
appellee Bacolod-Murcia Milling Co., Inc., adopted a resolution (Acts No. 11, Acuerdo No. 1) granting further
concessions to the planters over and above those contained in the printed Amended Milling Contract. The bone of
contention is paragraph 9 of this resolution, that reads as follows:
ACTA No. 11
SESSION DE LA JUNTA DIRECTIVA
AGOSTO 20, 1936
xxx xxx xxx
Acuerdo No. 1. — Previa mocion debidamente secundada, la Junta en consideracion a una
peticion de los plantadores hecha por un comite nombrado por los mismos, acuerda
enmendar el contrato de molienda enmendado medientelas siguentes:
xxx xxx xxx
9.a Que si durante la vigencia de este contrato de Molienda Enmendado, lascentrales
azucareras, de Negros Occidental, cuya produccion anual de azucar centrifugado sea mas de
una tercera parte de la produccion total de todas lascentrales azucareras de Negros
Occidental, concedieren a sus plantadores mejores condiciones que la estipuladas en el
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presente contrato, entonces esas mejores condiciones se concederan y por el presente se
entenderan concedidas a los platadores que hayan otorgado este Contrato de Molienda
Enmendado.
Appellants signed and executed the printed Amended Milling Contract on September 10, 1936, but a copy of the
resolution of August 10, 1936, signed by the Central's General Manager, was not attached to the printed contract
until April 17, 1937; with the notation —
Las enmiendas arriba transcritas forman parte del contrato de molienda enmendado, otorgado por — y
la Bacolod-Murcia Milling Co., Inc.
In 1953, the appellants initiated the present action, contending that three Negros sugar centrals (La Carlota,
Binalbagan-Isabela and San Carlos), with a total annual production exceeding one-third of the production of all the
sugar central mills in the province, had already granted increased participation (of 62.5%) to their planters, and that
under paragraph 9 of the resolution of August 20, 1936, heretofore quoted, the appellee had become obligated to
grant similar concessions to the plaintiffs (appellants herein). The appellee Bacolod-Murcia Milling Co., inc.,
resisted the claim, and defended by urging that the stipulations contained in the resolution were made without
consideration; that the resolution in question was, therefore, null and void ab initio, being in effect a donation that
was ultra viresand beyond the powers of the corporate directors to adopt.
After trial, the court below rendered judgment upholding the stand of the defendant Milling company, and
dismissed the complaint. Thereupon, plaintiffs duly appealed to this Court.
We agree with appellants that the appealed decisions can not stand. It must be remembered that the controverted
resolution was adopted by appellee corporation as a supplement to, or further amendment of, the proposed milling
contract, and that it was approved on August 20, 1936, twenty-one days prior to the signing by appellants on
September 10, of the Amended Milling Contract itself; so that when the Milling Contract was executed, the
concessions granted by the disputed resolution had been already incorporated into its terms. No reason appears of
record why, in the face of such concessions, the appellants should reject them or consider them as separate and
apart from the main amended milling contract, specially taking into account that appellant Alfredo Montelibano was,
at the time, the President of the Planters Association (Exhibit 4, p. 11) that had agitated for the concessions
embodied in the resolution of August 20, 1936. That the resolution formed an integral part of the amended milling
contract, signed on September 10, and not a separate bargain, is further shown by the fact that a copy of the
resolution was simply attached to the printed contract without special negotiations or agreement between the
parties.
It follows from the foregoing that the terms embodied in the resolution of August 20, 1936 were supported by the
same causa or consideration underlying the main amended milling contract; i.e., the promises and obligations
undertaken thereunder by the planters, and, particularly, the extension of its operative period for an additional 15
years over and beyond the 30 years stipulated in the original contract. Hence, the conclusion of the court below
that the resolution constituted gratuitous concessions not supported by any consideration is legally untenable.
All disquisition concerning donations and the lack of power of the directors of the respondent sugar milling
company to make a gift to the planters would be relevant if the resolution in question had embodied a separate
agreement after the appellants had already bound themselves to the terms of the printed milling contract. But this
was not the case. When the resolution was adopted and the additional concessions were made by the company,
the appellants were not yet obligated by the terms of the printed contract, since they admittedly did not sign it until
twenty-one days later, on September 10, 1936. Before that date, the printed form was no more than a proposal that
either party could modify at its pleasure, and the appellee actually modified it by adopting the resolution in
question. So that by September 10, 1936 defendant corporation already understood that the printed terms were
not controlling, save as modified by its resolution of August 20, 1936; and we are satisfied that such was also the
understanding of appellants herein, and that the minds of the parties met upon that basis. Otherwise there would
have been no consent or "meeting of the minds", and no binding contract at all. But the conduct of the parties
indicates that they assumed, and they do not now deny, that the signing of the contract on September 10, 1936,
did give rise to a binding agreement. That agreement had to exist on the basis of the printed terms as modified by
the resolution of August 20, 1936, or not at all. Since there is no rational explanation for the company's assenting
to the further concessions asked by the planters before the contracts were signed, except as further inducement
for the planters to agree to the extension of the contract period, to allow the company now to retract such
concessions would be to sanction a fraud upon the planters who relied on such additional stipulations.
The same considerations apply to the "void innovation" theory of appellees. There can be no novation unless two
distinct and successive binding contracts take place, with the later designed to replace the preceding convention.
Modifications introduced before a bargain becomes obligatory can in no sense constitute novation in law.
Stress is placed on the fact that the text of the Resolution of August 20, 1936 was not attached to the printed
contract until April 17, 1937. But, except in the case of statutory forms or solemn agreements (and it is not claimed
that this is one), it is the assent and concurrence (the "meeting of the minds") of the parties, and not the setting
down of its terms, that constitutes a binding contract. And the fact that the addendum is only signed by the General
Manager of the milling company emphasizes that the addition was made solely in order that the memorial of the
terms of the agreement should be full and complete.
Much is made of the circumstance that the report submitted by the Board of Directors of the appellee company in
November 19, 1936 (Exhibit 4) only made mention of 90%, the planters having agreed to the 60-40 sharing of the
sugar set forth in the printed "amended milling contracts", and did not make any reference at all to the terms of the
resolution of August 20, 1936. But a reading of this report shows that it was not intended to inventory all the details
of the amended contract; numerous provisions of the printed terms are alao glossed over. The Directors of the
appellee Milling Company had no reason at the time to call attention to the provisions of the resolution in question,
since it contained mostly modifications in detail of the printed terms, and the only major change was paragraph 9
heretofore quoted; but when the report was made, that paragraph was not yet in effect, since it was conditioned on
other centrals granting better concessions to their planters, and that did not happen until after 1950. There was no
reason in 1936 to emphasize a concession that was not yet, and might never be, in effective operation.
There can be no doubt that the directors of the appellee company had authority to modify the proposed terms of
the Amended Milling Contract for the purpose of making its terms more acceptable to the other contracting parties.
The rule is that —
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It is a question, therefore, in each case of the logical relation of the act to the corporate purpose 0,333% to appellants Montelibano for the 1951-1952 crop year, said appellants having received an
expressed in the charter. If that act is one which is lawful in itself, and not otherwise prohibited, is done additional 2% corresponding to said year in October, 1953;
for the purpose of serving corporate ends, and is reasonably tributary to the promotion of those ends, in
a substantial, and not in a remote and fanciful sense, it may fairly be considered within charter powers.
2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year; and to all appellants thereafter —
The test to be applied is whether the act in question is in direct and immediate furtherance of the
4.2% for the 1952-1953 crop year;
corporation's business, fairly incident to the express powers and reasonably necessary to their exercise.
4.3% for the 1953-1954 crop year;
If so, the corporation has the power to do it; otherwise, not. (Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950,
4.5% for the 1954-1955 crop year;
pp. 266-268)
3.5% for the 1955-1956 crop year;

As the resolution in question was passed in good faith by the board of directors, it is valid and binding, and whether
with interest at the legal rate on the value of such differential during the time they were withheld; and the right is
or not it will cause losses or decrease the profits of the central, the court has no authority to review them.
reserved to plaintiffs-appellants to sue for such additional increases as they may be entitled to for the crop years
subsequent to those herein adjudged.
They hold such office charged with the duty to act for the corporation according to their best judgment,
and in so doing they cannot be controlled in the reasonable exercise and performance of such duty.
Costs against appellee, Bacolod-Murcia Milling Co.
Whether the business of a corporation should be operated at a loss during depression, or close down at
a smaller loss, is a purely business and economic problem to be determined by the directors of the
corporation and not by the court. It is a well-known rule of law that questions of policy or of management Padilla, Bautista Angelo, Labrador, Concepcion, Barrera, Paredes and Dizon, JJ., concur.
are left solely to the honest decision of officers and directors of a corporation, and the court is without
authority to substitute its judgment of the board of directors; the board is the business manager of the
corporation, and so long as it acts in good faith its orders are not reviewable by the courts. (Fletcher on G.R. No. L-18062 February 28, 1963
Corporations, Vol. 2, p. 390).
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
And it appearing undisputed in this appeal that sugar centrals of La Carlota, Hawaiian Philippines, San Carlos and vs.
Binalbagan (which produce over one-third of the entire annual sugar production in Occidental Negros) have ACOJE MINING COMPANY, INC., defendant-appellant.
granted progressively increasing participations to their adhered planter at an average rate of
Office of the Solicitor General for plaintiff-appellee.
Jalandoni & Jamir for defendant-appellant.
62.333% for the 1951-52 crop year;

64.2% for 1952-53; BAUTISTA ANGELO, J.:

64.3% for 1953-54;

On May 17, 1948, the Acoje Mining Company, Inc. wrote the Director of Posts requesting the opening of a post,
64.5% for 1954-55; and telegraph and money order offices at its mining camp at Sta. Cruz, Zambales, to service its employees and their
families that were living in said camp. Acting on the request, the Director of Posts wrote in reply stating that if aside
63.5% for 1955-56, from free quarters the company would provide for all essential equipment and assign a responsible employee to
perform the duties of a postmaster without compensation from his office until such time as funds therefor may be
available he would agree to put up the offices requested. The company in turn replied signifying its willingness to
the appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution of August 20, 1936, duty bound comply with all the requirements outlined in the letter of the Director of Posts requesting at the same time that it be
to grant similar increases to plaintiffs-appellants herein. furnished with the necessary forms for the early establishment of a post office branch.

WHEREFORE, the decision under appeal is reversed and set aside; and judgment is decreed sentencing the On April 11, 1949, the Director of Posts again wrote a letter to the company stating among other things that "In
defendant-appellee to pay plaintiffs-appellants the differential or increase of participation in the milled sugar in cases where a post office will be opened under circumstances similar to the present, it is the policy of this office to
accordance with paragraph 9 of the appellee Resolution of August 20, 1936, over and in addition to the 60% have the company assume direct responsibility for whatever pecuniary loss may be suffered by the Bureau of
expressed in the printed Amended Milling Contract, or the value thereof when due, as follows: Posts by reason of any act of dishonesty, carelessness or negligence on the part of the employee of the company

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who is assigned to take charge of the post office," thereby suggesting that a resolution be adopted by the board of
directors of the company expressing conformity to the above condition relative to the responsibility to be assumed
buy it in the event a post office branch is opened as requested. On September 2, 1949, the company informed the
Director of Posts of the passage by its board of directors of a resolution of the following tenor: "That the
requirement of the Bureau of Posts that the Company should accept full responsibility for all cash received by the
Postmaster be complied with, and that a copy of this resolution be forwarded to the Bureau of Posts." The letter
further states that the company feels that that resolution fulfills the last condition imposed by the Director of Posts
and that, therefore, it would request that an inspector be sent to the camp for the purpose of acquainting the
postmaster with the details of the operation of the branch office.
The post office branch was opened at the camp on October 13, 1949 with one Hilario M. Sanchez as postmaster.
He is an employee of the company. On May 11, 1954, the postmaster went on a three-day leave but never
returned. The company immediately informed the officials of the Manila Post Office and the provincial auditor of
Zambales of Sanchez' disappearance with the result that the accounts of the postmaster were checked and a
shortage was found in the amount of P13,867.24.
The several demands made upon the company for the payment of the shortage in line with the liability it has
assumed having failed, the government commenced the present action on September 10, 1954 before the Court of
First Instance of Manila seeking to recover the amount of Pl3,867.24. The company in its answer denied liability for
said amount contending that the resolution of the board of directors wherein it assumed responsibility for the act of
the postmaster is ultra vires, and in any event its liability under said resolution is only that of a guarantor who
answers only after the exhaustion of the properties of the principal, aside from the fact that the loss claimed by the
plaintiff is not supported by the office record.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and approved by this
Honorable Court, without prejudice to the parties adducing other evidence to prove their case not covered by this
stipulation of facts. 1äwphï1.ñët
After trial, the court a quo found that, of the amount claimed by plaintiff totalling P13,867.24, only the sum of
P9,515.25 was supported by the evidence, and so it rendered judgment for the plaintiff only for the amount last
mentioned. The court rejected the contention that the resolution adopted by the company is ultra vires and that the
obligation it has assumed is merely that of a guarantor.
Defendant took the present appeal.
The contention that the resolution adopted by the company dated August 31, 1949 is ultra vires in the sense that it
has no authority to act on a matter which may render the company liable as a guarantor has no factual or legal
basis. In the first place, it should be noted that the opening of a post office branch at the mining camp of appellant
corporation was undertaken because of a request submitted by it to promote the convenience and benefit of its
employees. The idea did not come from the government, and the Director of Posts was prevailed upon to agree to
the request only after studying the necessity for its establishment and after imposing upon the company certain
requirements intended to safeguard and protect the interest of the government. Thus, after the company had
signified its willingness to comply with the requirement of the government that it furnish free quarters and all the
essential equipment that may be necessary for the operation of the office including the assignment of an employee
who will perform the duties of a postmaster, the Director of Posts agreed to the opening of the post office stating
that "In cases where a post office will be opened under circumstances similar to the present, it is the policy of this
office to have the company assume direct responsibility for whatever pecuniary loss may be suffered by the
Bureau of Posts by reason of any act of dishonesty, carelessness or negligence on the part of the employee of the
company who is assigned to take charge of the post office," and accepting this condition, the company, thru its
board of directors, adopted forthwith a resolution of the following tenor: "That the requirement of the Bureau of
Posts that the company should accept full responsibility for all cash received by the Postmaster, be complied with,
and that a copy of this resolution be forwarded to the Bureau of Posts." On the basis of the foregoing facts, it is
evident that the company cannot now be heard to complain that it is not liable for the irregularity committed by its
employee upon the technical plea that the resolution approved by its board of directors is ultra vires. The least that
can be said is that it cannot now go back on its plighted word on the ground of estoppel.
The claim that the resolution adopted by the board of directors of appellant company is an ultra vires act cannot
also be entertained it appearing that the same covers a subject which concerns the benefit, convenience and
welfare of its employees and their families. While as a rule an ultra vires act is one committed outside the object for
which a corporation is created as defined by the law of its organization and therefore beyond the powers conferred
upon it by law (19 C.J.S., Section 965, p. 419), there are however certain corporate acts that may be performed
outside of the scope of the powers expressly conferred if they are necessary to promote the interest or welfare of
the corporation. Thus, it has been held that "although not expressly authorized to do so a corporation may become
a surety where the particular transaction is reasonably necessary or proper to the conduct of its business,"1 and
here it is undisputed that the establishment of the local post office is a reasonable and proper adjunct to the
conduct of the business of appellant company. Indeed, such post office is a vital improvement in the living condition
of its employees and laborers who came to settle in its mining camp which is far removed from the postal facilities
or means of communication accorded to people living in a city or municipality..
Even assuming arguendo that the resolution in question constitutes an ultra vires act, the same however is not
void for it was approved not in contravention of law, customs, public order or public policy. The term ultra
vires should be distinguished from an illegal act for the former is merely voidable which may be enforced by
performance, ratification, or estoppel, while the latter is void and cannot be validated.2 It being merely voidable, an
ultra vires act can be enforced or validated if there are equitable grounds for taking such action. Here it is fair that
the resolution be upheld at least on the ground of estoppel. On this point, the authorities are overwhelming:
The weight of authority in the state courts is to the effect that a transaction which is merely ultra
vires and not malum in se or malum prohibitum, is, if performed by one party, not void as between the
parties to all intents and purposes, and that an action may be brought directly on the transaction and
relief had according to its terms. (19 C.J.S., Section 976, p. 432, citing Nettles v. Rhett, C.C.A.S.C., 94 F.
2d, reversing, D.C., 20 F. Supp. 48)
This rule is based on the consideration that as between private corporations, one party cannot receive
the benefits which are embraced in total performance of a contract made with it by another party and
then set up the invalidity of the transaction as a defense." (London & Lancashire Indemnity Co. of
America v. Fairbanks Steam Shovel Co., 147 N.E. 329, 332, 112 Ohio St. 136.)
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The defense of ultra vires rests on violation of trust or duty toward stockholders, and should not be
entertained where its allowance will do greater wrong to innocent parties dealing with corporation..
The acceptance of benefits arising from the performance by the other party may give rise to an estoppel
precluding repudiation of the transaction. (19 C.J.S., Section 976, p. 433.)
The current of modern authorities favors the rule that where the ultra vires transaction has been
executed by the other party and the corporation has received the benefit of it, the law interposes an
estoppel, and will not permit the validity of the transaction or contract to be questioned, and this is
especially true where there is nothing in the circumstances to put the other party to the transaction on
notice that the corporation has exceeded its powers in entering into it and has in so doing overstepped
the line of corporate privileges. (19 C.J.S., Section 977, pp. 435-437, citing Williams v. Peoples Building
& Loan Ass'n, 97 S.W. 2d 930, 193 Ark. 118; Hays v. Galion Gas Light Co., 29 Ohio St. 330)
Neither can we entertain the claim of appellant that its liability is only that of a guarantor. On this point, we agree
with the following comment of the court a quo: "A mere reading of the resolution of the Board of Directors dated
August 31, 1949, upon which the plaintiff based its claim would show that the responsibility of the defendant
company is not just that of a guarantor. Notice that the phraseology and the terms employed are so clear and
sweeping and that the defendant assumed 'full responsibility for all cash received by the Postmaster.' Here the
responsibility of the defendant is not just that of a guarantor. It is clearly that of a principal."
WHEREFORE, the decision appealed from is affirmed. No costs.
Bengzon, C.J., Padilla, Labrador, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, Regala and Makalintal, JJ.
concur.
G.R. No. 75875 December 15, 1989
WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and CHARLES CHAMSAY, petitioners,
vs.
SANITARY WARES MANUFACTURING CORPORATOIN, ERNESTO V. LAGDAMEO, ERNESTO R.
LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG and
AVELINO V. CRUZ, respondents.
G.R. No. 75951 December 15, 1989
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R. LAGDAMEO, ENRIQUE B.
LAGDAMEO, GEORGE FL .EE RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V. CRUX, petitioners,
vs.
THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM, CHARLES
CHAMSAY and LUCIANO SALAZAR, respondents.
G.R. Nos. 75975-76 December 15, 1989
LUCIANO E. SALAZAR, petitioner,
vs.
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO V. LAGDAMEO, ERNESTO R.
LAGDAMEO, JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG,
AVELINO V. CRUZ and the COURT OF APPEALS, respondents.
Belo, Abiera & Associates for petitioners in 75875.
Sycip, Salazar, Hernandez & Gatmaitan for Luciano E. Salazar.
GUTIERREZ, JR., J.:
These consolidated petitions seek the review of the amended decision of the Court of Appeals in CA-G.R. SP Nos.
05604 and 05617 which set aside the earlier decision dated June 5, 1986, of the then Intermediate Appellate Court
and directed that in all subsequent elections for directors of Sanitary Wares Manufacturing Corporation
(Saniwares), American Standard Inc. (ASI) cannot nominate more than three (3) directors; that the Filipino
stockholders shall not interfere in ASI's choice of its three (3) nominees; that, on the other hand, the Filipino
stockholders can nominate only six (6) candidates and in the event they cannot agree on the six (6) nominees,
they shall vote only among themselves to determine who the six (6) nominees will be, with cumulative voting to be
allowed but without interference from ASI.
The antecedent facts can be summarized as follows:
In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose of manufacturing and
marketing sanitary wares. One of the incorporators, Mr. Baldwin Young went abroad to look for foreign partners,
European or American who could help in its expansion plans. On August 15, 1962, ASI, a foreign corporation
domiciled in Delaware, United States entered into an Agreement with Saniwares and some Filipino investors
whereby ASI and the Filipino investors agreed to participate in the ownership of an enterprise which would engage
primarily in the business of manufacturing in the Philippines and selling here and abroad vitreous china and
sanitary wares. The parties agreed that the business operations in the Philippines shall be carried on by an
incorporated enterprise and that the name of the corporation shall initially be "Sanitary Wares Manufacturing
Corporation."
The Agreement has the following provisions relevant to the issues in these cases on the nomination and election of
the directors of the corporation:
3. Articles of Incorporation
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(a) The Articles of Incorporation of the Corporation shall be substantially in the form annexed
hereto as Exhibit A and, insofar as permitted under Philippine law, shall specifically provide for
(1) Cumulative voting for directors:
xxx xxx xxx
5. Management
(a) The management of the Corporation shall be vested in a Board of Directors, which shall
consist of nine individuals. As long as American-Standard shall own at least 30% of the
outstanding stock of the Corporation, three of the nine directors shall be designated by
American-Standard, and the other six shall be designated by the other stockholders of the
Corporation. (pp. 51 & 53, Rollo of 75875)
At the request of ASI, the agreement contained provisions designed to protect it as a minority group, including the
grant of veto powers over a number of corporate acts and the right to designate certain officers, such as a member
of the Executive Committee whose vote was required for important corporate transactions.
Later, the 30% capital stock of ASI was increased to 40%. The corporation was also registered with the Board of
Investments for availment of incentives with the condition that at least 60% of the capital stock of the corporation
shall be owned by Philippine nationals.
The joint enterprise thus entered into by the Filipino investors and the American corporation prospered.
Unfortunately, with the business successes, there came a deterioration of the initially harmonious relations
between the two groups. According to the Filipino group, a basic disagreement was due to their desire to expand
the export operations of the company to which ASI objected as it apparently had other subsidiaries of joint joint
venture groups in the countries where Philippine exports were contemplated. On March 8, 1983, the annual
stockholders' meeting was held. The meeting was presided by Baldwin Young. The minutes were taken by the
Secretary, Avelino Cruz. After disposing of the preliminary items in the agenda, the stockholders then proceeded to
the election of the members of the board of directors. The ASI group nominated three persons namely; Wolfgang
Aurbach, John Griffin and David P. Whittingham. The Philippine investors nominated six, namely; Ernesto
Lagdameo, Sr., Raul A. Boncan, Ernesto R. Lagdameo, Jr., George F. Lee, and Baldwin Young. Mr. Eduardo R,
Ceniza then nominated Mr. Luciano E. Salazar, who in turn nominated Mr. Charles Chamsay. The chairman,
Baldwin Young ruled the last two nominations out of order on the basis of section 5 (a) of the Agreement, the
consistent practice of the parties during the past annual stockholders' meetings to nominate only nine persons as
nominees for the nine-member board of directors, and the legal advice of Saniwares' legal counsel. The following
events then, transpired:
... There were protests against the action of the Chairman and heated arguments ensued. An
appeal was made by the ASI representative to the body of stockholders present that a vote be
taken on the ruling of the Chairman. The Chairman, Baldwin Young, declared the appeal out of
order and no vote on the ruling was taken. The Chairman then instructed the Corporate
Secretary to cast all the votes present and represented by proxy equally for the 6 nominees of
the Philippine Investors and the 3 nominees of ASI, thus effectively excluding the 2 additional
persons nominated, namely, Luciano E. Salazar and Charles Chamsay. The ASI
representative, Mr. Jaqua protested the decision of the Chairman and announced that all votes
accruing to ASI shares, a total of 1,329,695 (p. 27, Rollo, AC-G.R. SP No. 05617) were being
cumulatively voted for the three ASI nominees and Charles Chamsay, and instructed the
Secretary to so vote. Luciano E. Salazar and other proxy holders announced that all the votes
owned by and or represented by them 467,197 shares (p. 27, Rollo, AC-G.R. SP No. 05617)
were being voted cumulatively in favor of Luciano E. Salazar. The Chairman, Baldwin Young,
nevertheless instructed the Secretary to cast all votes equally in favor of the three ASI
nominees, namely, Wolfgang Aurbach, John Griffin and David Whittingham and the six
originally nominated by Rogelio Vinluan, namely, Ernesto Lagdameo, Sr., Raul Boncan,
Ernesto Lagdameo, Jr., Enrique Lagdameo, George F. Lee, and Baldwin Young. The Secretary
then certified for the election of the following Wolfgang Aurbach, John Griffin, David
Whittingham Ernesto Lagdameo, Sr., Ernesto Lagdameo, Jr., Enrique Lagdameo, George F.
Lee, Raul A. Boncan, Baldwin Young. The representative of ASI then moved to recess the
meeting which was duly seconded. There was also a motion to adjourn (p. 28, Rollo, AC-G.R.
SP No. 05617). This motion to adjourn was accepted by the Chairman, Baldwin Young, who
announced that the motion was carried and declared the meeting adjourned. Protests against
the adjournment were registered and having been ignored, Mr. Jaqua the ASI representative,
stated that the meeting was not adjourned but only recessed and that the meeting would be
reconvened in the next room. The Chairman then threatened to have the stockholders who did
not agree to the decision of the Chairman on the casting of votes bodily thrown out. The ASI
Group, Luciano E. Salazar and other stockholders, allegedly representing 53 or 54% of the
shares of Saniwares, decided to continue the meeting at the elevator lobby of the American
Standard Building. The continued meeting was presided by Luciano E. Salazar, while Andres
Gatmaitan acted as Secretary. On the basis of the cumulative votes cast earlier in the meeting,
the ASI Group nominated its four nominees; Wolfgang Aurbach, John Griffin, David
Whittingham and Charles Chamsay. Luciano E. Salazar voted for himself, thus the said five
directors were certified as elected directors by the Acting Secretary, Andres Gatmaitan, with
the explanation that there was a tie among the other six (6) nominees for the four (4)
remaining positions of directors and that the body decided not to break the tie. (pp. 37-39,
Rollo of 75975-76)
These incidents triggered off the filing of separate petitions by the parties with the Securities and Exchange
Commission (SEC). The first petition filed was for preliminary injunction by Saniwares, Emesto V. Lagdameo,
Baldwin Young, Raul A. Bonean Ernesto R. Lagdameo, Jr., Enrique Lagdameo and George F. Lee against Luciano
Salazar and Charles Chamsay. The case was denominated as SEC Case No. 2417. The second petition was for
quo warranto and application for receivership by Wolfgang Aurbach, John Griffin, David Whittingham, Luciano E.
Salazar and Charles Chamsay against the group of Young and Lagdameo (petitioners in SEC Case No. 2417) and
Avelino F. Cruz. The case was docketed as SEC Case No. 2718. Both sets of parties except for Avelino Cruz
claimed to be the legitimate directors of the corporation.
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The two petitions were consolidated and tried jointly by a hearing officer who rendered a decision upholding the
election of the Lagdameo Group and dismissing the quo warranto petition of Salazar and Chamsay. The ASI Group
and Salazar appealed the decision to the SEC en banc which affirmed the hearing officer's decision.
The SEC decision led to the filing of two separate appeals with the Intermediate Appellate Court by Wolfgang
Aurbach, John Griffin, David Whittingham and Charles Chamsay (docketed as AC-G.R. SP No. 05604) and by
Luciano E. Salazar (docketed as AC-G.R. SP No. 05617). The petitions were consolidated and the appellate court
in its decision ordered the remand of the case to the Securities and Exchange Commission with the directive that a
new stockholders' meeting of Saniwares be ordered convoked as soon as possible, under the supervision of the
Commission.
Upon a motion for reconsideration filed by the appellees Lagdameo Group) the appellate court (Court of Appeals)
rendered the questioned amended decision. Petitioners Wolfgang Aurbach, John Griffin, David P. Whittingham and
Charles Chamsay in G.R. No. 75875 assign the following errors:
I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE ALLEGED ELECTION OF PRIVATE
RESPONDENTS AS MEMBERS OF THE BOARD OF DIRECTORS OF SANIWARES WHEN
IN FACT THERE WAS NO ELECTION AT ALL.
II. THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS FROM EXERCISING
THEIR FULL VOTING RIGHTS REPRESENTED BY THE NUMBER OF SHARES IN
SANIWARES, THUS DEPRIVING PETITIONERS AND THE CORPORATION THEY
REPRESENT OF THEIR PROPERTY RIGHTS WITHOUT DUE PROCESS OF LAW.
III. THE COURT OF APPEALS IMPOSES CONDITIONS AND READS PROVISIONS INTO
THE AGREEMENT OF THE PARTIES WHICH WERE NOT THERE, WHICH ACTION IT
CANNOT LEGALLY DO. (p. 17, Rollo-75875)
Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended decision on the following grounds:
11.1. ThatAmendedDecisionwouldsanctiontheCA'sdisregard of binding contractual agreements
entered into by stockholders and the replacement of the conditions of such agreements with
terms never contemplated by the stockholders but merely dictated by the CA .
11.2. The Amended decision would likewise sanction the deprivation of the property rights of
stockholders without due process of law in order that a favored group of stockholders may be
illegally benefitted and guaranteed a continuing monopoly of the control of a corporation. (pp.
14-15, Rollo-75975-76)
On the other hand, the petitioners in G.R. No. 75951 contend that:
I
THE AMENDED DECISION OF THE RESPONDENT COURT, WHILE RECOGNIZING THAT
THE STOCKHOLDERS OF SANIWARES ARE DIVIDED INTO TWO BLOCKS, FAILS TO
FULLY ENFORCE THE BASIC INTENT OF THE AGREEMENT AND THE LAW.
II
THE AMENDED DECISION DOES NOT CATEGORICALLY RULE THAT PRIVATE
PETITIONERS HEREIN WERE THE DULY ELECTED DIRECTORS DURING THE 8 MARCH
1983 ANNUAL STOCKHOLDERS MEETING OF SANTWARES. (P. 24, Rollo-75951)
The issues raised in the petitions are interrelated, hence, they are discussed jointly.
The main issue hinges on who were the duly elected directors of Saniwares for the year 1983 during its annual
stockholders' meeting held on March 8, 1983. To answer this question the following factors should be determined:
(1) the nature of the business established by the parties whether it was a joint venture or a corporation and (2)
whether or not the ASI Group may vote their additional 10% equity during elections of Saniwares' board of
directors.
The rule is that whether the parties to a particular contract have thereby established among themselves a joint
venture or some other relation depends upon their actual intention which is determined in accordance with the
rules governing the interpretation and construction of contracts. (Terminal Shares, Inc. v. Chicago, B. and Q.R. Co.
(DC MO) 65 F Supp 678; Universal Sales Corp. v. California Press Mfg. Co. 20 Cal. 2nd 751, 128 P 2nd 668)
The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the actual intention of the parties should
be viewed strictly on the "Agreement" dated August 15,1962 wherein it is clearly stated that the parties' intention
was to form a corporation and not a joint venture.
They specifically mention number 16 under Miscellaneous Provisions which states:
xxx xxx xxx
c) nothing herein contained shall be construed to constitute any of the parties hereto partners
or joint venturers in respect of any transaction hereunder. (At P. 66, Rollo-GR No. 75875)
They object to the admission of other evidence which tends to show that the parties' agreement was to establish a
joint venture presented by the Lagdameo and Young Group on the ground that it contravenes the parol evidence
rule under section 7, Rule 130 of the Revised Rules of Court. According to them, the Lagdameo and Young Group
never pleaded in their pleading that the "Agreement" failed to express the true intent of the parties.
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The parol evidence Rule under Rule 130 provides:
Evidence of written agreements-When the terms of an agreement have been reduced to
writing, it is to be considered as containing all such terms, and therefore, there can be,
between the parties and their successors in interest, no evidence of the terms of the
agreement other than the contents of the writing, except in the following cases:
(a) Where a mistake or imperfection of the writing, or its failure to express the true intent and
agreement of the parties or the validity of the agreement is put in issue by the pleadings.
(b) When there is an intrinsic ambiguity in the writing.
Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded in their Reply and Answer to
Counterclaim in SEC Case No. 2417 that the Agreement failed to express the true intent of the parties, to wit:
xxx xxx xxx
4. While certain provisions of the Agreement would make it appear that the parties thereto
disclaim being partners or joint venturers such disclaimer is directed at third parties and is not
inconsistent with, and does not preclude, the existence of two distinct groups of stockholders
in Saniwares one of which (the Philippine Investors) shall constitute the majority, and the other
ASI shall constitute the minority stockholder. In any event, the evident intention of the
Philippine Investors and ASI in entering into the Agreement is to enter into ajoint venture
enterprise, and if some words in the Agreement appear to be contrary to the evident intention
of the parties, the latter shall prevail over the former (Art. 1370, New Civil Code). The various
stipulations of a contract shall be interpreted together attributing to the doubtful ones that
sense which may result from all of them taken jointly (Art. 1374, New Civil Code). Moreover, in
order to judge the intention of the contracting parties, their contemporaneous and subsequent
acts shall be principally considered. (Art. 1371, New Civil Code). (Part I, Original Records,
SEC Case No. 2417)
It has been ruled:
In an action at law, where there is evidence tending to prove that the parties joined their efforts
in furtherance of an enterprise for their joint profit, the question whether they intended by their
agreement to create a joint adventure, or to assume some other relation is a question of fact
for the jury. (Binder v. Kessler v 200 App. Div. 40,192 N Y S 653; Pyroa v. Brownfield (Tex. Civ.
A.) 238 SW 725; Hoge v. George, 27 Wyo, 423, 200 P 96 33 C.J. p. 871)
In the instant cases, our examination of important provisions of the Agreement as well as the testimonial evidence
presented by the Lagdameo and Young Group shows that the parties agreed to establish a joint venture and not a
corporation. The history of the organization of Saniwares and the unusual arrangements which govern its policy
making body are all consistent with a joint venture and not with an ordinary corporation. As stated by the SEC:
According to the unrebutted testimony of Mr. Baldwin Young, he negotiated the Agreement
with ASI in behalf of the Philippine nationals. He testified that ASI agreed to accept the role of
minority vis-a-vis the Philippine National group of investors, on the condition that the
Agreement should contain provisions to protect ASI as the minority.
An examination of the Agreement shows that certain provisions were included to protect the
interests of ASI as the minority. For example, the vote of 7 out of 9 directors is required in
certain enumerated corporate acts [Sec. 3 (b) (ii) (a) of the Agreement]. ASI is contractually
entitled to designate a member of the Executive Committee and the vote of this member is
required for certain transactions [Sec. 3 (b) (i)].
The Agreement also requires a 75% super-majority vote for the amendment of the articles and
by-laws of Saniwares [Sec. 3 (a) (iv) and (b) (iii)]. ASI is also given the right to designate the
president and plant manager [Sec. 5 (6)]. The Agreement further provides that the sales policy
of Saniwares shall be that which is normally followed by ASI [Sec. 13 (a)] and that Saniwares
should not export "Standard" products otherwise than through ASI's Export Marketing Services
[Sec. 13 (6)]. Under the Agreement, ASI agreed to provide technology and know-how to
Saniwares and the latter paid royalties for the same. (At p. 2).
xxx xxx xxx
It is pertinent to note that the provisions of the Agreement requiring a 7 out of 9 votes of the
board of directors for certain actions, in effect gave ASI (which designates 3 directors under
the Agreement) an effective veto power. Furthermore, the grant to ASI of the right to designate
certain officers of the corporation; the super-majority voting requirements for amendments of
the articles and by-laws; and most significantly to the issues of tms case, the provision that
ASI shall designate 3 out of the 9 directors and the other stockholders shall designate the
other 6, clearly indicate that there are two distinct groups in Saniwares, namely ASI, which
owns 40% of the capital stock and the Philippine National stockholders who own the balance
of 60%, and that 2) ASI is given certain protections as the minority stockholder.
Premises considered, we believe that under the Agreement there are two groups of
stockholders who established a corporation with provisions for a special contractual
relationship between the parties, i.e., ASI and the other stockholders. (pp. 4-5)
Section 5 (a) of the agreement uses the word "designated" and not "nominated" or "elected" in the selection of the
nine directors on a six to three ratio. Each group is assured of a fixed number of directors in the board.
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Moreover, ASI in its communications referred to the enterprise as joint venture. Baldwin Young also testified that
Section 16(c) of the Agreement that "Nothing herein contained shall be construed to constitute any of the parties
hereto partners or joint venturers in respect of any transaction hereunder" was merely to obviate the possibility of
the enterprise being treated as partnership for tax purposes and liabilities to third parties.
Quite often, Filipino entrepreneurs in their desire to develop the industrial and manufacturing capacities of a local
firm are constrained to seek the technology and marketing assistance of huge multinational corporations of the
developed world. Arrangements are formalized where a foreign group becomes a minority owner of a firm in
exchange for its manufacturing expertise, use of its brand names, and other such assistance. However, there is
always a danger from such arrangements. The foreign group may, from the start, intend to establish its own sole or
monopolistic operations and merely uses the joint venture arrangement to gain a foothold or test the Philippine
waters, so to speak. Or the covetousness may come later. As the Philippine firm enlarges its operations and
becomes profitable, the foreign group undermines the local majority ownership and actively tries to completely or
predominantly take over the entire company. This undermining of joint ventures is not consistent with fair dealing to
say the least. To the extent that such subversive actions can be lawfully prevented, the courts should extend
protection especially in industries where constitutional and legal requirements reserve controlling ownership to
Filipino citizens.
The Lagdameo Group stated in their appellees' brief in the Court of Appeal
In fact, the Philippine Corporation Code itself recognizes the right of stockholders to enter into
agreements regarding the exercise of their voting rights.
Sec. 100. Agreements by stockholders.-
xxx xxx xxx
2. An agreement between two or more stockholders, if in writing and signed by the parties
thereto, may provide that in exercising any voting rights, the shares held by them shall be
voted as therein provided, or as they may agree, or as determined in accordance with a
procedure agreed upon by them.
Appellants contend that the above provision is included in the Corporation Code's chapter on
close corporations and Saniwares cannot be a close corporation because it has 95
stockholders. Firstly, although Saniwares had 95 stockholders at the time of the disputed
stockholders meeting, these 95 stockholders are not separate from each other but are divisible
into groups representing a single Identifiable interest. For example, ASI, its nominees and
lawyers count for 13 of the 95 stockholders. The YoungYutivo family count for another 13
stockholders, the Chamsay family for 8 stockholders, the Santos family for 9 stockholders, the
Dy family for 7 stockholders, etc. If the members of one family and/or business or interest
group are considered as one (which, it is respectfully submitted, they should be for purposes
of determining how closely held Saniwares is there were as of 8 March 1983, practically only
17 stockholders of Saniwares. (Please refer to discussion in pp. 5 to 6 of appellees' Rejoinder
Memorandum dated 11 December 1984 and Annex "A" thereof).
Secondly, even assuming that Saniwares is technically not a close corporation because it has
more than 20 stockholders, the undeniable fact is that it is a close-held corporation. Surely,
appellants cannot honestly claim that Saniwares is a public issue or a widely held corporation.
In the United States, many courts have taken a realistic approach to joint venture corporations
and have not rigidly applied principles of corporation law designed primarily for public issue
corporations. These courts have indicated that express arrangements between corporate joint
ventures should be construed with less emphasis on the ordinary rules of law usually applied
to corporate entities and with more consideration given to the nature of the agreement
between the joint venturers (Please see Wabash Ry v. American Refrigerator Transit Co., 7 F
2d 335; Chicago, M & St. P. Ry v. Des Moines Union Ry; 254 Ass'n. 247 US. 490'; Seaboard
Airline Ry v. Atlantic Coast Line Ry; 240 N.C. 495,.82 S.E. 2d 771; Deboy v. Harris, 207 Md.,
212,113 A 2d 903; Hathway v. Porter Royalty Pool, Inc., 296 Mich. 90, 90, 295 N.W. 571;
Beardsley v. Beardsley, 138 U.S. 262; "The Legal Status of Joint Venture Corporations", 11
Vand Law Rev. p. 680,1958). These American cases dealt with legal questions as to the extent
to which the requirements arising from the corporate form of joint venture corporations should
control, and the courts ruled that substantial justice lay with those litigants who relied on the
joint venture agreement rather than the litigants who relied on the orthodox principles of
corporation law.
As correctly held by the SEC Hearing Officer:
It is said that participants in a joint venture, in organizing the joint venture deviate from the
traditional pattern of corporation management. A noted authority has pointed out that just as in
close corporations, shareholders' agreements in joint venture corporations often contain
provisions which do one or more of the following: (1) require greater than majority vote for
shareholder and director action; (2) give certain shareholders or groups of shareholders power
to select a specified number of directors; (3) give to the shareholders control over the selection
and retention of employees; and (4) set up a procedure for the settlement of disputes by
arbitration (See I O' Neal, Close Corporations, 1971 ed., Section 1.06a, pp. 15-16) (Decision
of SEC Hearing Officer, P. 16)
Thirdly paragraph 2 of Sec. 100 of the Corporation Code does not necessarily imply that
agreements regarding the exercise of voting rights are allowed only in close corporations. As
Campos and Lopez-Campos explain:
Paragraph 2 refers to pooling and voting agreements in particular. Does this provision
necessarily imply that these agreements can be valid only in close corporations as defined by
the Code? Suppose that a corporation has twenty five stockholders, and therefore cannot
qualify as a close corporation under section 96, can some of them enter into an agreement to
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vote as a unit in the election of directors? It is submitted that there is no reason for denying
stockholders of corporations other than close ones the right to enter into not voting or pooling
agreements to protect their interests, as long as they do not intend to commit any wrong, or
fraud on the other stockholders not parties to the agreement. Of course, voting or pooling
agreements are perhaps more useful and more often resorted to in close corporations. But
they may also be found necessary even in widely held corporations. Moreover, since the Code
limits the legal meaning of close corporations to those which comply with the requisites laid
down by section 96, it is entirely possible that a corporation which is in fact a close corporation
will not come within the definition. In such case, its stockholders should not be precluded from
entering into contracts like voting agreements if these are otherwise valid. (Campos & Lopez-
Campos, op cit, p. 405)
In short, even assuming that sec. 5(a) of the Agreement relating to the designation or
nomination of directors restricts the right of the Agreement's signatories to vote for directors,
such contractual provision, as correctly held by the SEC, is valid and binding upon the
signatories thereto, which include appellants. (Rollo No. 75951, pp. 90-94)
In regard to the question as to whether or not the ASI group may vote their additional equity during elections of
Saniwares' board of directors, the Court of Appeals correctly stated:
As in other joint venture companies, the extent of ASI's participation in the management of the
corporation is spelled out in the Agreement. Section 5(a) hereof says that three of the nine
directors shall be designated by ASI and the remaining six by the other stockholders, i.e., the
Filipino stockholders. This allocation of board seats is obviously in consonance with the
minority position of ASI.
Having entered into a well-defined contractual relationship, it is imperative that the parties
should honor and adhere to their respective rights and obligations thereunder. Appellants
seem to contend that any allocation of board seats, even in joint venture corporations, are null
and void to the extent that such may interfere with the stockholder's rights to cumulative voting
as provided in Section 24 of the Corporation Code. This Court should not be prepared to hold
that any agreement which curtails in any way cumulative voting should be struck down, even if
such agreement has been freely entered into by experienced businessmen and do not
prejudice those who are not parties thereto. It may well be that it would be more cogent to
hold, as the Securities and Exchange Commission has held in the decision appealed from,
that cumulative voting rights may be voluntarily waived by stockholders who enter into special
relationships with each other to pursue and implement specific purposes, as in joint venture
relationships between foreign and local stockholders, so long as such agreements do not
adversely affect third parties.
In any event, it is believed that we are not here called upon to make a general rule on this
question. Rather, all that needs to be done is to give life and effect to the particular contractual
rights and obligations which the parties have assumed for themselves.
On the one hand, the clearly established minority position of ASI and the contractual allocation
of board seats Cannot be disregarded. On the other hand, the rights of the stockholders to
cumulative voting should also be protected.
In our decision sought to be reconsidered, we opted to uphold the second over the first. Upon
further reflection, we feel that the proper and just solution to give due consideration to both
factors suggests itself quite clearly. This Court should recognize and uphold the division of the
stockholders into two groups, and at the same time uphold the right of the stockholders within
each group to cumulative voting in the process of determining who the group's nominees
would be. In practical terms, as suggested by appellant Luciano E. Salazar himself, this
means that if the Filipino stockholders cannot agree who their six nominees will be, a vote
would have to be taken among the Filipino stockholders only. During this voting, each Filipino
stockholder can cumulate his votes. ASI, however, should not be allowed to interfere in the
voting within the Filipino group. Otherwise, ASI would be able to designate more than the three
directors it is allowed to designate under the Agreement, and may even be able to get a
majority of the board seats, a result which is clearly contrary to the contractual intent of the
parties.
Such a ruling will give effect to both the allocation of the board seats and the stockholder's
right to cumulative voting. Moreover, this ruling will also give due consideration to the issue
raised by the appellees on possible violation or circumvention of the Anti-Dummy Law (Com.
Act No. 108, as amended) and the nationalization requirements of the Constitution and the
laws if ASI is allowed to nominate more than three directors. (Rollo-75875, pp. 38-39)
The ASI Group and petitioner Salazar, now reiterate their theory that the ASI Group has the right to vote their
additional equity pursuant to Section 24 of the Corporation Code which gives the stockholders of a corporation the
right to cumulate their votes in electing directors. Petitioner Salazar adds that this right if granted to the ASI Group
would not necessarily mean a violation of the Anti-Dummy Act (Commonwealth Act 108, as amended). He cites
section 2-a thereof which provides:
And provided finally that the election of aliens as members of the board of directors or
governing body of corporations or associations engaging in partially nationalized activities
shall be allowed in proportion to their allowable participation or share in the capital of such
entities. (amendments introduced by Presidential Decree 715, section 1, promulgated May 28,
1975)
The ASI Group's argument is correct within the context of Section 24 of the Corporation Code. The point of query,
however, is whether or not that provision is applicable to a joint venture with clearly defined agreements:
The legal concept of ajoint venture is of common law origin. It has no precise legal definition
but it has been generally understood to mean an organization formed for some temporary
purpose. (Gates v. Megargel, 266 Fed. 811 [1920]) It is in fact hardly distinguishable from the
partnership, since their elements are similar community of interest in the business, sharing of
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profits and losses, and a mutual right of control. Blackner v. Mc Dermott, 176 F. 2d. 498, Act No. 108, as amended) and the nationalization requirements of the Constitution and the
[1949]; Carboneau v. Peterson, 95 P. 2d., 1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, laws if ASI is allowed to nominate more than three directors. (At p. 39, Rollo, 75875)
288 P. 2d. 12 289 P. 2d. 242 [1955]). The main distinction cited by most opinions in common
law jurisdictions is that the partnership contemplates a general business with some degree of
Equally important as the consideration of the contractual intent of the parties is the consideration as regards the
continuity, while the joint venture is formed for the execution of a single transaction, and is thus
possible domination by the foreign investors of the enterprise in violation of the nationalization requirements
of a temporary nature. (Tufts v. Mann 116 Cal. App. 170, 2 P. 2d. 500 [1931]; Harmon v.
enshrined in the Constitution and circumvention of the Anti-Dummy Act. In this regard, petitioner Salazar's position
Martin, 395 111. 595, 71 NE 2d. 74 [1947]; Gates v. Megargel 266 Fed. 811 [1920]). This
is that the Anti-Dummy Act allows the ASI group to elect board directors in proportion to their share in the capital of
observation is not entirely accurate in this jurisdiction, since under the Civil Code, a
the entity. It is to be noted, however, that the same law also limits the election of aliens as members of the board of
partnership may be particular or universal, and a particular partnership may have for its object
directors in proportion to their allowance participation of said entity. In the instant case, the foreign Group ASI was
a specific undertaking. (Art. 1783, Civil Code). It would seem therefore that under Philippine
limited to designate three directors. This is the allowable participation of the ASI Group. Hence, in future dealings,
law, a joint venture is a form of partnership and should thus be governed by the law of
this limitation of six to three board seats should always be maintained as long as the joint venture agreement exists
partnerships. The Supreme Court has however recognized a distinction between these two
considering that in limiting 3 board seats in the 9-man board of directors there are provisions already agreed upon
business forms, and has held that although a corporation cannot enter into a partnership
and embodied in the parties' Agreement to protect the interests arising from the minority status of the foreign
contract, it may however engage in a joint venture with others. (At p. 12, Tuazon v. Bolanos,
investors.
95 Phil. 906 [1954]) (Campos and Lopez-Campos Comments, Notes and Selected Cases,
Corporation Code 1981)
With these findings, we the decisions of the SEC Hearing Officer and SEC which were impliedly affirmed by the
appellate court declaring Messrs. Wolfgang Aurbach, John Griffin, David P Whittingham, Emesto V. Lagdameo,
Moreover, the usual rules as regards the construction and operations of contracts generally apply to a contract of
Baldwin young, Raul A. Boncan, Emesto V. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee as the duly
joint venture. (O' Hara v. Harman 14 App. Dev. (167) 43 NYS 556).
elected directors of Saniwares at the March 8,1983 annual stockholders' meeting.

Bearing these principles in mind, the correct view would be that the resolution of the question of whether or not the
On the other hand, the Lagdameo and Young Group (petitioners in G.R. No. 75951) object to a cumulative voting
ASI Group may vote their additional equity lies in the agreement of the parties.
during the election of the board of directors of the enterprise as ruled by the appellate court and submits that the
six (6) directors allotted the Filipino stockholders should be selected by consensus pursuant to section 5 (a) of the
Necessarily, the appellate court was correct in upholding the agreement of the parties as regards the allocation of Agreement which uses the word "designate" meaning "nominate, delegate or appoint."
director seats under Section 5 (a) of the "Agreement," and the right of each group of stockholders to cumulative
voting in the process of determining who the group's nominees would be under Section 3 (a) (1) of the
They also stress the possibility that the ASI Group might take control of the enterprise if the Filipino stockholders
"Agreement." As pointed out by SEC, Section 5 (a) of the Agreement relates to the manner of nominating the
are allowed to select their nominees separately and not as a common slot determined by the majority of their
members of the board of directors while Section 3 (a) (1) relates to the manner of voting for these nominees.
group.

This is the proper interpretation of the Agreement of the parties as regards the election of members of the board of
directors.
To allow the ASI Group to vote their additional equity to help elect even a Filipino director who would be beholden
to them would obliterate their minority status as agreed upon by the parties. As aptly stated by the appellate court:
Section 5 (a) of the Agreement which uses the word designates in the allocation of board directors should not be
interpreted in isolation. This should be construed in relation to section 3 (a) (1) of the Agreement. As we stated
earlier, section 3(a) (1) relates to the manner of voting for these nominees which is cumulative voting while section
5(a) relates to the manner of nominating the members of the board of directors. The petitioners in G.R. No. 75951
agreed to this procedure, hence, they cannot now impugn its legality.

... ASI, however, should not be allowed to interfere in the voting within the Filipino group.
Otherwise, ASI would be able to designate more than the three directors it is allowed to
designate under the Agreement, and may even be able to get a majority of the board seats, a
result which is clearly contrary to the contractual intent of the parties.
Such a ruling will give effect to both the allocation of the board seats and the stockholder's
right to cumulative voting. Moreover, this ruling will also give due consideration to the issue
raised by the appellees on possible violation or circumvention of the Anti-Dummy Law (Com.
The insinuation that the ASI Group may be able to control the enterprise under the cumulative voting procedure
cannot, however, be ignored. The validity of the cumulative voting procedure is dependent on the directors thus
elected being genuine members of the Filipino group, not voters whose interest is to increase the ASI share in the
management of Saniwares. The joint venture character of the enterprise must always be taken into account, so
long as the company exists under its original agreement. Cumulative voting may not be used as a device to enable
ASI to achieve stealthily or indirectly what they cannot accomplish openly. There are substantial safeguards in the
Agreement which are intended to preserve the majority status of the Filipino investors as well as to maintain the
minority status of the foreign investors group as earlier discussed. They should be maintained.

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WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are DISMISSED and the petition in G.R.
No. 75951 is partly GRANTED. The amended decision of the Court of Appeals is MODIFIED in that Messrs. c. The plaintiff shall, every time the defendant corporation is ready to deliver the good, open with any bank or
Wolfgang Aurbach John Griffin, David Whittingham Emesto V. Lagdameo, Baldwin Young, Raul A. Boncan, Ernesto
banking institution a confirmed, unconditional, and irrevocable letter of credit in favor of the corporation and that upon
R. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee are declared as the duly elected directors of Saniwares
at the March 8,1983 annual stockholders' meeting. In all other respects, the questioned decision is AFFIRMED. certification by the boat captain on the bill of lading that the goods have been loaded on board the vessel bound for Davao
Costs against the petitioners in G.R. Nos. 75975-76 and G.R. No. 75875. the said bank or banking institution shall release the corresponding amount as payment of the goods so shipped.

SO ORDERED. Right after the plaintiff entered into the aforesaid dealership agreement, he placed an advertisement in a national, circulating
newspaper the fact of his being the exclusive dealer of the defendant corporation's white cement products in Mindanao area,
more particularly, in the Manila Chronicle dated August 16, 1969 (Exhibits R and R-1) and was even congratulated by his
SECOND DIVISION
business associates, so much so, he was asked by some of his businessmen friends and close associates if they can be his
sub-dealer in the Mindanao area.
G.R. No. L-68555 March 19, 1993

Relying heavily on the dealership agreement, plaintiff sometime in the months of September, October, and December, 1969,
PRIME WHITE CEMENT CORPORATION, Petitioner, vs. HONORABLE INTERMEDIATE APPELLATE COURT and ALEJANDRO TE,
entered into a written agreement with several hardware stores dealing in buying and selling white cement in the Cities of
Respondents.
Davao and Cagayan de Oro which would thus enable him to sell his allocation of 20,000 bags regular supply of the said
commodity, by September, 1970 (Exhibits O, O-1, O-2, P, P-1, P-2, Q, Q-1 and Q-2). After the plaintiff was assured by his
De Jesus & Associates for petitioner.
supposed buyer that his allocation of 20,000 bags of white cement can be disposed of, he informed the defendant
corporation in his letter dated August 18, 1970 that he is making the necessary preparation for the opening of the requisite
Padlan, Sutton, Mendoza & Associates for private respondent.
letter of credit to cover the price of the due initial delivery for the month of September, 1970 (Exhibit B), looking forward to
the defendant corporation's duty to comply with the dealership agreement. In reply to the aforesaid letter of the plaintiff, the
CAMPOS, JR., J.:
defendant corporation thru its corporate secretary, replied that the board of directors of the said defendant decided to
impose the following conditions:
Before Us is a Petition for Review on Certiorari filed by petitioner Prime White Cement Corporation seeking the reversal of
the decision * of the then Intermediate Appellate Court, the dispositive portion of which reads as follows:
a. Delivery of white cement shall commence at the end of November, 1970;
WHEREFORE, in view of the foregoing, the judgment appealed from is hereby affirmed in toto. 1
b. Only 8,000 bags of white cement per month for only a period of three (3) months will be delivered;
The facts, as found by the trial court and as adopted by the respondent Court are hereby quoted, to wit:
c. The price of white cement was priced at P13.30 per bag;
On or about the 16th day of July, 1969, plaintiff and defendant corporation thru its President, Mr. Zosimo Falcon and Justo C.
d. The price of white cement is subject to readjustment unilaterally on the part of the defendant;
Trazo, as Chairman of the Board, entered into a dealership agreement (Exhibit A) whereby said plaintiff was obligated to act
as the exclusive dealer and/or distributor of the said defendant corporation of its cement products in the entire Mindanao
e. The place of delivery of white cement shall be Austurias (sic);
area for a term of five (5) years and proving (sic) among others that:

f. The letter of credit may be opened only with the Prudential Bank, Makati Branch;
a. The corporation shall, commencing September, 1970, sell to and supply the plaintiff, as dealer with 20,000 bags
(94 lbs/bag) of white cement per month;
g. Payment of white cement shall be made in advance and which payment shall be used by the defendant as
guaranty in the opening of a foreign letter of credit to cover costs and expenses in the procurement of materials in the
b. The plaintiff shall pay the defendant corporation P9.70, Philippine Currency, per bag of white cement, FOB Davao
manufacture of white cement. (Exhibit C).
and Cagayan de Oro ports;

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xxx xxx xxx
Several demands to comply with the dealership agreement (Exhibits D, E, G, I, R, L, and N) were made by the plaintiff to the
defendant, however, defendant refused to comply with the same, and plaintiff by force of circumstances was constrained to
cancel his agreement for the supply of white cement with third parties, which were concluded in anticipation of, and
pursuant to the said dealership agreement.
Notwithstanding that the dealership agreement between the plaintiff and defendant was in force and subsisting, the
defendant corporation, in violation of, and with evident intention not to be bound by the terms and conditions thereof,
entered into an exclusive dealership agreement with a certain Napoleon Co for the marketing of white cement in Mindanao
(Exhibit T) hence, this suit. (Plaintiff's Record on Appeal, pp. 86-90). 2
After trial, the trial court adjudged the corporation liable to Alejandro Te in the amount of P3,302,400.00 as actual damages,
P100,000.00 as moral damages, and P10,000.00 as and for attorney's fees and costs. The appellate court affirmed the said
decision mainly on the following basis, and We quote:
There is no dispute that when Zosimo R. Falcon and Justo B. Trazo signed the dealership agreement Exhibit "A", they were the
President and Chairman of the Board, respectively, of defendant-appellant corporation. Neither is the genuineness of the said
agreement contested. As a matter of fact, it appears on the face of the contract itself that both officers were duly authorized
to enter into the said agreement and signed the same for and in behalf of the corporation. When they, therefore, entered
into the said transaction they created the impression that they were duly clothed with the authority to do so. It cannot now
be said that the disputed agreement which possesses all the essential requisites of a valid contract was never intended to
bind the corporation as this avoidance is barred by the principle of estoppel. 3
In this petition for review, petitioner Prime White Cement Corporation made the following assignment of errors. 4
I the contract; or by acceptance and retention of benefits flowing therefrom. 7 Furthermore, even in the absence of express or
THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT ARE UNPRECEDENTED DEPARTURES FROM THE
CODIFIED PRINCIPLE THAT CORPORATE OFFICERS COULD ENTER INTO CONTRACTS IN BEHALF OF THE CORPORATION ONLY
WITH PRIOR APPROVAL OF THE BOARD OF DIRECTORS.
II
THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT ARE CONTRARY TO THE ESTABLISHED
JURISPRUDENCE, PRINCIPLE AND RULE ON FIDUCIARY DUTY OF DIRECTORS AND OFFICERS OF THE CORPORATION.
III
THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT DISREGARDED THE PRINCIPLE AND
JURISPRUDENCE, PRINCIPLE AND RULE ON UNENFORCEABLE CONTRACTS AS PROVIDED IN ARTICLE 1317 OF THE NEW CIVIL
CODE.
IV
THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT DISREGARDED THE PRINCIPLE AND
JURISPRUDENCE AS TO WHEN AWARD OF ACTUAL AND MORAL DAMAGES IS PROPER.
V
IN NOT AWARDING PETITIONER'S CAUSE OF ACTION AS STATED IN ITS ANSWER WITH SPECIAL AND AFFIRMATIVE DEFENSES
WITH COUNTERCLAIM THE INTERMEDIATE APPELLATE COURT HAS CLEARLY DEPARTED FROM THE ACCEPTED USUAL, COURSE
OF JUDICIAL PROCEEDINGS.
There is only one legal issue to be resolved by this Court: whether or not the "dealership agreement" referred by the
President and Chairman of the Board of petitioner corporation is a valid and enforceable contract. We do not agree with the
conclusion of the respondent Court that it is.
Under the Corporation Law, which was then in force at the time this case arose, 5as well as under the present Corporation
Code, all corporate powers shall be exercised by the Board of Directors, except as otherwise provided by law. 6 Although it
cannot completely abdicate its power and responsibility to act for the juridical entity, the Board may expressly delegate
specific powers to its President or any of its officers. In the absence of such express delegation, a contract entered into by its
President, on behalf of the corporation, may still bind the corporation if the board should ratify the same expressly or
impliedly. Implied ratification may take various forms - like silence or acquiescence; by acts showing approval or adoption of
implied authority by ratification, the President as such may, as a general rule, bind the corporation by a contract in the
ordinary course of business, provided the same is reasonable under the circumstances. 8 These rules are basic, but are all
general and thus quite flexible. They apply where the President or other officer, purportedly acting for the corporation, is
dealing with a third person, i. e., a person outside the corporation.
The situation is quite different where a director or officer is dealing with his own corporation. In the instant case respondent
Te was not an ordinary stockholder; he was a member of the Board of Directors and Auditor of the corporation as well. He
was what is often referred to as a "self-dealing" director.
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A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. 9 In case his
interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit. As corporate
managers, directors are committed to seek the maximum amount of profits for the corporation. This trust relationship "is not
a matter of statutory or technical law. It springs from the fact that directors have the control and guidance of corporate affairs
and property and hence of the property interests of the stockholders." 10 In the case of Gokongwei v. Securities and
Exchange Commission, this Court quoted with favor from Pepper v. Litton, 11thus:
. . . He cannot by the intervention of a corporate entity violate the ancient precept against serving two masters. . . . He cannot
utilize his inside information and his strategic position for his own preferment. He cannot violate rules of fair play by doing
indirectly through the corporation what he could not do directly. He cannot use his power for his personal advantage and to
the detriment of the stockholders and creditors no matter how absolute in terms that power may be and no matter how
meticulous he is to satisfy technical requirements. For that power is at all times subject to the equitable limitation that it may
not be exercised for the aggrandizement, preference, or advantage of the fiduciary to the exclusion or detriment of the
cestuis. . . . .
On the other hand, a director's contract with his corporation is not in all instances void or voidable. If the contract is fair and
reasonable under the circumstances, it may be ratified by the stockholders provided a full disclosure of his adverse interest is
made. Section 32 of the Corporation Code provides, thus:
Sec. 32. Dealings of directors, trustees or officers with the corporation. - A contract of the corporation with one or more of
its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are
present:
1. That the presence of such director or trustee in the board meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the approval of the contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in the case of an officer, the contract with the officer has been previously authorized by the Board of
Directors.
Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director
or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full
disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That the
contract is fair and reasonable under the circumstances.
Although the old Corporation Law which governs the instant case did not contain a similar provision, yet the cited provision
substantially incorporates well-settled principles in corporate law. 12
Granting arguendo that the "dealership agreement" involved here would be valid and enforceable if entered into with a
person other than a director or officer of the corporation, the fact that the other party to the contract was a Director and
Auditor of the petitioner corporation changes the whole situation. First of all, We believe that the contract was neither fair
nor reasonable. The "dealership agreement" entered into in July, 1969, was to sell and supply to respondent Te 20,000 bags
of white cement per month, for five years starting September, 1970, at the fixed price of P9.70 per bag. Respondent Te is a
businessman himself and must have known, or at least must be presumed to know, that at that time, prices of commodities
in general, and white cement in particular, were not stable and were expected to rise. At the time of the contract, petitioner
corporation had not even commenced the manufacture of white cement, the reason why delivery was not to begin until 14
months later. He must have known that within that period of six years, there would be a considerable rise in the price of
white cement. In fact, respondent Te's own Memorandum shows that in September, 1970, the price per bag was P14.50, and
by the middle of 1975, it was already P37.50 per bag. Despite this, no provision was made in the "dealership agreement" to
allow for an increase in price mutually acceptable to the parties. Instead, the price was pegged at P9.70 per bag for the whole
five years of the contract. Fairness on his part as a director of the corporation from whom he was to buy the cement, would
require such a provision. In fact, this unfairness in the contract is also a basis which renders a contract entered into by the
President, without authority from the Board of Directors, void or voidable, although it may have been in the ordinary course
of business. We believe that the fixed price of P9.70 per bag for a period of five years was not fair and reasonable.
Respondent Te, himself, when he subsequently entered into contracts to resell the cement to his "new dealers" Henry Wee
13 and Gaudencio Galang 14 stipulated as follows:
The price of white cement shall be mutually determined by us but in no case shall the same be less than P14.00 per bag (94
lbs).
The contract with Henry Wee was on September 15, 1969, and that with Gaudencio Galang, on October 13, 1967. A similar
contract with Prudencio Lim was made on December 29, 1969. 15 All of these contracts were entered into soon after his
"dealership agreement" with petitioner corporation, and in each one of them he protected himself from any increase in the
market price of white cement. Yet, except for the contract with Henry Wee, the contracts were for only two years from
October, 1970. Why did he not protect the corporation in the same manner when he entered into the "dealership
agreement"? For that matter, why did the President and the Chairman of the Board not do so either? As director, specially
since he was the other party in interest, respondent Te's bounden duty was to act in such manner as not to unduly prejudice
the corporation. In the light of the circumstances of this case, it is to Us quite clear that he was guilty of disloyalty to the
corporation; he was attempting in effect, to enrich himself at the expense of the corporation. There is no showing that the
stockholders ratified the "dealership agreement" or that they were fully aware of its provisions. The contract was therefore
not valid and this Court cannot allow him to reap the fruits of his disloyalty.
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As a result of this action which has been proven to be without legal basis, petitioner corporation's reputation and goodwill
have been prejudiced. However, there can be no award for moral damages under Article 2217 and succeeding articles on
Section 1 of Chapter 3 of Title XVIII of the Civil Code in favor of a corporation.
In view of the foregoing, the Decision and Resolution of the Intermediate Appellate Court dated March 30, 1984 and August
6, 1984, respectively, are hereby SET ASIDE. Private respondent Alejandro Te is hereby ordered to pay petitioner corporation
the sum of P20,000.00 for attorney's fees, plus the cost of suit and expenses of litigation.
SO ORDERED.
479 Phil. 896
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision[1] of the Court of Appeals in CA-G.R. CV No. 56125 reversing the
Decision[2] of the Regional Trial Court of Makati, Branch 57, which ruled in favor of the petitioner.
The Antecedents
The respondent Roxas Electric and Construction Company, Inc. (RECCI), formerly the Roxas Electric and Construction
Company, was the owner of two parcels of land, identified as Lot No. 491-A-3-B-1 covered by Transfer Certificate of Title
(TCT) No. 78085 and Lot No. 491-A-3-B-2 covered by TCT No. 78086. A portion of Lot No. 491-A-3-B-1 which abutted Lot No.
491-A-3-B-2 was a dirt road accessing to the Sumulong Highway, Antipolo, Rizal.
At a special meeting on May 17, 1991, the respondent's Board of Directors approved a resolution authorizing the
corporation, through its president, Roberto B. Roxas, to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086, with an area of
7,213 square meters, at a price and under such terms and conditions which he deemed most reasonable and advantageous
to the corporation; and to execute, sign and deliver the pertinent sales documents and receive the proceeds of the sale for
and on behalf of the company.[3]
Petitioner Woodchild Holdings, Inc. (WHI) wanted to buy Lot No. 491-A-3-B-2 covered by TCT No. 78086 on which it planned
to construct its warehouse building, and a portion of the adjoining lot, Lot No. 491-A-3-B-1, so that its 45-foot container van
would be able to readily enter or leave the property. In a Letter to Roxas dated June 21, 1991, WHI President Jonathan Y. Dy
offered to buy Lot No. 491-A-3-B-2 under stated terms and conditions for P1,000 per square meter or at the price of
P7,213,000.[4] One of the terms incorporated in Dy's offer was the following provision:
This Offer to Purchase is made on the representation and warranty of the OWNER/SELLER, that he holds a good and
registrable title to the property, which shall be conveyed CLEAR and FREE of all liens and encumbrances, and that the area of
7,213 square meters of the subject property already includes the area on which the right of way traverses from the main lot
(area) towards the exit to the Sumulong Highway as shown in the location plan furnished by the Owner/Seller to the buyer.
Furthermore, in the event that the right of way is insufficient for the buyer's purposes (example: entry of a 45-foot
container), the seller agrees to sell additional square meter from his current adjacent property to allow the buyer to full
access and full use of the property.[5]
Roxas indicated his acceptance of the offer on page 2 of the deed. Less than a month later or on July 1, 1991, Roxas, as
President of RECCI, as vendor, and Dy, as President of WHI, as vendee, executed a contract to sell in which RECCI bound and
obliged itself to sell to Dy Lot No. 491-A-3-B-2 covered by TCT No. 78086 for P7,213,000.[6] On September 5, 1991, a Deed of
Absolute Sale[7] in favor of WHI was issued, under which Lot No. 491-A-3-B-2 covered by TCT No. 78086 was sold for
P5,000,000, receipt of which was acknowledged by Roxas under the following terms and conditions:
The Vendor agree (sic), as it hereby agrees and binds itself to give Vendee the beneficial use of and a right of way from
Sumulong Highway to the property herein conveyed consists of 25 square meters wide to be used as the latter's egress from
and ingress to and an additional 25 square meters in the corner of Lot No. 491-A-3-B-1, as turning and/or maneuvering area
for Vendee's vehicles.
The Vendor agrees that in the event that the right of way is insufficient for the Vendee's use (ex entry of a 45-foot container)
the Vendor agrees to sell additional square meters from its current adjacent property to allow the Vendee full access and full
use of the property.
…
The Vendor hereby undertakes and agrees, at its account, to defend the title of the Vendee to the parcel of land and
improvements herein conveyed, against all claims of any and all persons or entities, and that the Vendor hereby warrants the
right of the Vendee to possess and own the said parcel of land and improvements thereon and will defend the Vendee
against all present and future claims and/or action in relation thereto, judicial and/or administrative. In particular, the Vendor
shall eject all existing squatters and occupants of the premises within two (2) weeks from the signing hereof. In case of failure
on the part of the Vendor to eject all occupants and squatters within the two-week period or breach of any of the
stipulations, covenants and terms and conditions herein provided and that of contract to sell dated 1 July 1991, the Vendee
shall have the right to cancel the sale and demand reimbursement for all payments made to the Vendor with interest thereon
at 36% per annum.[8]
On September 10, 1991, the Wimbeco Builder's, Inc. (WBI) submitted its quotation for P8,649,000 to WHI for the
construction of the warehouse building on a portion of the property with an area of 5,088 square meters.[9] WBI proposed
to start the project on October 1, 1991 and to turn over the building to WHI on February 29, 1992.[10]
In a Letter dated September 16, 1991, Ponderosa Leather Goods Company, Inc. confirmed its lease agreement with WHI of a
5,000-square-meter portion of the warehouse yet to be constructed at the rental rate of P65 per square meter. Ponderosa
emphasized the need for the warehouse to be ready for occupancy before April 1, 1992.[11] WHI accepted the offer.
However, WBI failed to commence the construction of the warehouse in October 1, 1991 as planned because of the presence
of squatters in the property and suggested a renegotiation of the contract after the squatters shall have been evicted.[12]
Subsequently, the squatters were evicted from the property.
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On March 31, 1992, WHI and WBI executed a Letter-Contract for the construction of the warehouse building for P11,804,160.
[13] The contractor started construction in April 1992 even before the building officials of Antipolo City issued a building
permit on May 28, 1992. After the warehouse was finished, WHI issued on March 21, 1993 a certificate of occupancy by the
building official. Earlier, or on March 18, 1993, WHI, as lessor, and Ponderosa, as lessee, executed a contract of lease over a
portion of the property for a monthly rental of P300,000 for a period of three years from March 1, 1993 up to February 28,
1996.[14]
In the meantime, WHI complained to Roberto Roxas that the vehicles of RECCI were parked on a portion of the property over
which WHI had been granted a right of way. Roxas promised to look into the matter. Dy and Roxas discussed the need of the
WHI to buy a 500-square-meter portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 as provided for in the deed of
absolute sale. However, Roxas died soon thereafter. On April 15, 1992, the WHI wrote the RECCI, reiterating its verbal
requests to purchase a portion of the said lot as provided for in the deed of absolute sale, and complained about the latter's
failure to eject the squatters within the three-month period agreed upon in the said deed.
The WHI demanded that the RECCI sell a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 for its beneficial use
within 72 hours from notice thereof, otherwise the appropriate action would be filed against it. RECCI rejected the demand of
WHI. WHI reiterated its demand in a Letter dated May 29, 1992. There was no response from RECCI.
On June 17, 1992, the WHI filed a complaint against the RECCI with the Regional Trial Court of Makati, for specific
performance and damages, and alleged, inter alia, the following in its complaint:
The "current adjacent property" referred to in the aforequoted paragraph of the Deed of Absolute Sale pertains to the
property covered by Transfer Certificate of Title No. N-78085 of the Registry of Deeds of Antipolo, Rizal, registered in the
name of herein defendant Roxas Electric.
Defendant Roxas Electric in patent violation of the express and valid terms of the Deed of Absolute Sale unjustifiably refused
to deliver to Woodchild Holdings the stipulated beneficial use and right of way consisting of 25 square meters and 55 square
meters to the prejudice of the plaintiff.
Similarly, in as much as the 25 square meters and 55 square meters alloted to Woodchild Holdings for its beneficial use is
inadequate as turning and/or maneuvering area of its 45-foot container van, Woodchild Holdings manifested its intention
pursuant to para. 5 of the Deed of Sale to purchase additional square meters from Roxas Electric to allow it full access and
use of the purchased property, however, Roxas Electric refused and failed to merit Woodchild Holdings' request contrary to
defendant Roxas Electric's obligation under the Deed of Absolute Sale (Annex "A").
Moreover, defendant, likewise, failed to eject all existing squatters and occupants of the premises within the stipulated time
frame and as a consequence thereof, plaintiff's planned construction has been considerably delayed for seven (7) months due
to the squatters who continue to trespass and obstruct the subject property, thereby Woodchild Holdings incurred
substantial losses amounting to P3,560,000.00 occasioned by the increased cost of construction materials and labor.
Owing further to Roxas Electric's deliberate refusal to comply with its obligation under Annex "A," Woodchild Holdings
suffered unrealized income of P300,000.00 a month or P2,100,000.00 supposed income from rentals of the subject property
for seven (7) months.
On April 15, 1992, Woodchild Holdings made a final demand to Roxas Electric to comply with its obligations and warranties
under the Deed of Absolute Sale but notwithstanding such demand, defendant Roxas Electric refused and failed and continue
to refuse and fail to heed plaintiff's demand for compliance.
Copy of the demand letter dated April 15, 1992 is hereto attached as Annex "B" and made an integral part hereof.
Finally, on 29 May 1991, Woodchild Holdings made a letter request addressed to Roxas Electric to particularly annotate on
Transfer Certificate of Title No. N-78085 the agreement under Annex "A" with respect to the beneficial use and right of way,
however, Roxas Electric unjustifiably ignored and disregarded the same.
Copy of the letter request dated 29 May 1992 is hereto attached as Annex "C" and made an integral part hereof.
By reason of Roxas Electric's continuous refusal and failure to comply with Woodchild Holdings' valid demand for compliance
under Annex "A," the latter was constrained to litigate, thereby incurring damages as and by way of attorney's fees in the
amount of P100,000.00 plus costs of suit and expenses of litigation.[15]
The WHI prayed that, after due proceedings, judgment be rendered in its favor, thus:
WHEREFORE, it is respectfully prayed that judgment be rendered in favor of Woodchild Holdings and ordering Roxas Electric
the following:
a) to deliver to Woodchild Holdings the beneficial use of the stipulated 25 square meters and 55 square meters;
b) to sell to Woodchild Holdings additional 25 and 100 square meters to allow it full access and use of the purchased property
pursuant to para. 5 of the Deed of Absolute Sale;
c) to cause annotation on Transfer Certificate of Title No. N-78085 the beneficial use and right of way granted to Woodchild
Holdings under the Deed of Absolute Sale;
d) to pay Woodchild Holdings the amount of P5,660,000.00, representing actual damages and unrealized income;
e) to pay attorney's fees in the amount of P100,000.00; and
f) to pay the costs of suit.
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Other reliefs just and equitable are prayed for.[16]
In its answer to the complaint, the RECCI alleged that it never authorized its former president, Roberto Roxas, to grant the
beneficial use of any portion of Lot No. 491-A-3-B-1, nor agreed to sell any portion thereof or create a lien or burden thereon.
It alleged that, under the Resolution approved on May 17, 1991, it merely authorized Roxas to sell Lot No. 491-A-3-B-2
covered by TCT No. 78086. As such, the grant of a right of way and the agreement to sell a portion of Lot No. 491-A-3-B-1
covered by TCT No. 78085 in the said deed are ultra vires. The RECCI further alleged that the provision therein that it would
sell a portion of Lot No. 491-A-3-B-1 to the WHI lacked the essential elements of a binding contract.[17]
In its amended answer to the complaint, the RECCI alleged that the delay in the construction of its warehouse building was
due to the failure of the WHI's contractor to secure a building permit thereon.[18]
During the trial, Dy testified that he told Roxas that the petitioner was buying a portion of Lot No. 491-A-3-B-1 consisting of
an area of 500 square meters, for the price of P1,000 per square meter.
On November 11, 1996, the trial court rendered judgment in favor of the WHI, the decretal portion of which reads:
WHEREFORE, judgment is hereby rendered directing defendant:
(1) To allow plaintiff the beneficial use of the existing right of way plus the stipulated 25 sq. m. and 55 sq. m.;
(2) To sell to plaintiff an additional area of 500 sq. m. priced at P1,000 per sq. m. to allow said plaintiff full access and use of
the purchased property pursuant to Par. 5 of their Deed of Absolute Sale;
(3) To cause annotation on TCT No. N-78085 the beneficial use and right of way granted by their Deed of Absolute Sale;
(4) To pay plaintiff the amount of P5,568,000 representing actual damages and plaintiff's unrealized income;
(5) To pay plaintiff P100,000 representing attorney's fees; and
To pay the costs of suit.
SO ORDERED.[19]
The trial court ruled that the RECCI was estopped from disowning the apparent authority of Roxas under the May 17, 1991
Resolution of its Board of Directors. The court reasoned that to do so would prejudice the WHI which transacted with Roxas
in good faith, believing that he had the authority to bind the WHI relating to the easement of right of way, as well as the right
to purchase a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085.
The RECCI appealed the decision to the CA, which rendered a decision on November 9, 1999 reversing that of the trial court,
and ordering the dismissal of the complaint. The CA ruled that, under the resolution of the Board of Directors of the RECCI,
Roxas was merely authorized to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086, but not to grant right of way in favor of
the WHI over a portion of Lot No. 491-A-3-B-1, or to grant an option to the petitioner to buy a portion thereof. The appellate
court also ruled that the grant of a right of way and an option to the respondent were so lopsided in favor of the respondent
because the latter was authorized to fix the location as well as the price of the portion of its property to be sold to the
respondent. Hence, such provisions contained in the deed of absolute sale were not binding on the RECCI. The appellate
court ruled that the delay in the construction of WHI's warehouse was due to its fault.
The Present Petition
The petitioner now comes to this Court asserting that:
I.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF ABSOLUTE SALE (EXH. "C") IS ULTRA VIRES.
II.
THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE RULING OF THE COURT A QUO ALLOWING THE PLAINTIFF-
APPELLEE THE BENEFICIAL USE OF THE EXISTING RIGHT OF WAY PLUS THE STIPULATED 25 SQUARE METERS AND 55 SQUARE
METERS BECAUSE THESE ARE VALID STIPULATIONS AGREED BY BOTH PARTIES TO THE DEED OF ABSOLUTE SALE (EXH. "C").
III.
THERE IS NO FACTUAL PROOF OR EVIDENCE FOR THE COURT OF APPEALS TO RULE THAT THE STIPULATIONS OF THE DEED OF
ABSOLUTE SALE (EXH. "C") WERE DISADVANTAGEOUS TO THE APPELLEE, NOR WAS APPELLEE DEPRIVED OF ITS PROPERTY
WITHOUT DUE PROCESS.
IV.
IN FACT, IT WAS WOODCHILD WHO WAS DEPRIVED OF PROPERTY WITHOUT DUE PROCESS BY THE ASSAILED DECISION.
V.
THE DELAY IN THE CONSTRUCTION WAS DUE TO THE FAILURE OF THE APPELLANT TO EVICT THE SQUATTERS ON THE LAND AS
AGREED IN THE DEED OF ABSOLUTE SALE (EXH. "C").
VI.
THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE RULING OF THE COURT A QUO DIRECTING THE DEFENDANT TO
PAY THE PLAINTIFF THE AMOUNT OF P5,568,000.00 REPRESENTING ACTUAL DAMAGES AND PLAINTIFF'S UNREALIZED
INCOME AS WELL AS ATTORNEY'S FEES.[20]
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The threshold issues for resolution are the following: (a) whether the respondent is bound by the provisions in the deed of
absolute sale granting to the petitioner beneficial use and a right of way over a portion of Lot No. 491-A-3-B-1 accessing to
the Sumulong Highway and granting the option to the petitioner to buy a portion thereof, and, if so, whether such agreement
is enforceable against the respondent; (b) whether the respondent failed to eject the squatters on its property within two
weeks from the execution of the deed of absolute sale; and, (c) whether the respondent is liable to the petitioner for
damages.
On the first issue, the petitioner avers that, under its Resolution of May 17, 1991, the respondent authorized Roxas, then its
president, to grant a right of way over a portion of Lot No. 491-A-3-B-1 in favor of the petitioner, and an option for the
respondent to buy a portion of the said property. The petitioner contends that when the respondent sold Lot No. 491-A-3-B-2
covered by TCT No. 78086, it (respondent) was well aware of its obligation to provide the petitioner with a means of ingress
to or egress from the property to the Sumulong Highway, since the latter had no adequate outlet to the public highway. The
petitioner asserts that it agreed to buy the property covered by TCT No. 78085 because of the grant by the respondent of a
right of way and an option in its favor to buy a portion of the property covered by TCT No. 78085. It contends that the
respondent never objected to Roxas' acceptance of its offer to purchase the property and the terms and conditions therein;
the respondent even allowed Roxas to execute the deed of absolute sale in its behalf. The petitioner asserts that the
respondent even received the purchase price of the property without any objection to the terms and conditions of the said
deed of sale. The petitioner claims that it acted in good faith, and contends that after having been benefited by the said sale,
the respondent is estopped from assailing its terms and conditions. The petitioner notes that the respondent's Board of
Directors never approved any resolution rejecting the deed of absolute sale executed by Roxas for and in its behalf. As such,
the respondent is obliged to sell a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 with an area of 500 square
meters at the price of P1,000 per square meter, based on its evidence and Articles 649 and 651 of the New Civil Code.
For its part, the respondent posits that Roxas was not so authorized under the May 17, 1991 Resolution of its Board of
Directors to impose a burden or to grant a right of way in favor of the petitioner on Lot No. 491-A-3-B-1, much less convey a
portion thereof to the petitioner. Hence, the respondent was not bound by such provisions contained in the deed of absolute
sale. Besides, the respondent contends, the petitioner cannot enforce its right to buy a portion of the said property since
there was no agreement in the deed of absolute sale on the price thereof as well as the specific portion and area to be
purchased by the petitioner.
We agree with the respondent.
In San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals,[21] we held that:
A corporation is a juridical person separate and distinct from its stockholders or members. Accordingly, the property of the
corporation is not the property of its stockholders or members and may not be sold by the stockholders or members without
express authorization from the corporation's board of directors. Section 23 of BP 68, otherwise known as the Corporation
Code of the Philippines, provides:
"SEC. 23. The Board of Directors or Trustees. Unless otherwise provided in this Code, the corporate powers of all corporations
formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held
by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among
the members of the corporation, who shall hold office for one (1) year and until their successors are elected and qualified."
Indubitably, a corporation may act only through its board of directors or, when authorized either by its by-laws or by its board
resolution, through its officers or agents in the normal course of business. The general principles of agency govern the
relation between the corporation and its officers or agents, subject to the articles of incorporation, by-laws, or relevant
provisions of law. …[22]
Generally, the acts of the corporate officers within the scope of their authority are binding on the corporation. However,
under Article 1910 of the New Civil Code, acts done by such officers beyond the scope of their authority cannot bind the
corporation unless it has ratified such acts expressly or tacitly, or is estopped from denying them:
Art. 1910. The principal must comply with all the obligations which the agent may have contracted within the scope of his
authority.
As for any obligation wherein the agent has exceeded his power, the principal is not bound except when he ratifies it
expressly or tacitly.
Thus, contracts entered into by corporate officers beyond the scope of authority are unenforceable against the corporation
unless ratified by the corporation.[23]
In BA Finance Corporation v. Court of Appeals,[24] we also ruled that persons dealing with an assumed agency, whether the
assumed agency be a general or special one, are bound at their peril, if they would hold the principal liable, to ascertain not
only the fact of agency but also the nature and extent of authority, and in case either is controverted, the burden of proof is
upon them to establish it.
In this case, the respondent denied authorizing its then president Roberto B. Roxas to sell a portion of Lot No. 491-A-3-B-1
covered by TCT No. 78085, and to create a lien or burden thereon. The petitioner was thus burdened to prove that the
respondent so authorized Roxas to sell the same and to create a lien thereon.
Central to the issue at hand is the May 17, 1991 Resolution of the Board of Directors of the respondent, which is worded as
follows:
RESOLVED, as it is hereby resolved, that the corporation, thru the President, sell to any interested buyer, its 7,213-sq.-meter
property at the Sumulong Highway, Antipolo, Rizal, covered by Transfer Certificate of Title No. N-78086, at a price and on
terms and conditions which he deems most reasonable and advantageous to the corporation;
FURTHER RESOLVED, that Mr. ROBERTO B. ROXAS, President of the corporation, be, as he is hereby authorized to execute,
sign and deliver the pertinent sales documents and receive the proceeds of sale for and on behalf of the company.[25]
Evidently, Roxas was not specifically authorized under the said resolution to grant a right of way in favor of the petitioner on a
portion of Lot No. 491-A-3-B-1 or to agree to sell to the petitioner a portion thereof. The authority of Roxas, under the
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resolution, to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086 did not include the authority to sell a portion of the
adjacent lot, Lot No. 491-A-3-B-1, or to create or convey real rights thereon. Neither may such authority be implied from the
authority granted to Roxas to sell Lot No. 491-A-3-B-2 to the petitioner "on such terms and conditions which he deems most
reasonable and advantageous." Under paragraph 12, Article 1878 of the New Civil Code, a special power of attorney is
required to convey real rights over immovable property.[26] Article 1358 of the New Civil Code requires that contracts which
have for their object the creation of real rights over immovable property must appear in a public document.[27] The
petitioner cannot feign ignorance of the need for Roxas to have been specifically authorized in writing by the Board of
Directors to be able to validly grant a right of way and agree to sell a portion of Lot No. 491-A-3-B-1. The rule is that if the act
of the agent is one which requires authority in writing, those dealing with him are charged with notice of that fact.[28]
Powers of attorney are generally construed strictly and courts will not infer or presume broad powers from deeds which do
not sufficiently include property or subject under which the agent is to deal.[29] The general rule is that the power of
attorney must be pursued within legal strictures, and the agent can neither go beyond it; nor beside it. The act done must be
legally identical with that authorized to be done.[30] In sum, then, the consent of the respondent to the assailed provisions in
the deed of absolute sale was not obtained; hence, the assailed provisions are not binding on it.
We reject the petitioner's submission that, in allowing Roxas to execute the contract to sell and the deed of absolute sale and
failing to reject or disapprove the same, the respondent thereby gave him apparent authority to grant a right of way over Lot
No. 491-A-3-B-1 and to grant an option for the respondent to sell a portion thereof to the petitioner. Absent estoppel or
ratification, apparent authority cannot remedy the lack of the written power required under the statement of frauds.[31] In
addition, the petitioner's fallacy is its wrong assumption of the unproved premise that the respondent had full knowledge of
all the terms and conditions contained in the deed of absolute sale when Roxas executed it.
It bears stressing that apparent authority is based on estoppel and can arise from two instances: first, the principal may
knowingly permit the agent to so hold himself out as having such authority, and in this way, the principal becomes estopped
to claim that the agent does not have such authority; second, the principal may so clothe the agent with the indicia of
authority as to lead a reasonably prudent person to believe that he actually has such authority.[32] There can be no apparent
authority of an agent without acts or conduct on the part of the principal and such acts or conduct of the principal must have
been known and relied upon in good faith and as a result of the exercise of reasonable prudence by a third person as
claimant and such must have produced a change of position to its detriment. The apparent power of an agent is to be
determined by the acts of the principal and not by the acts of the agent.[33]
For the principle of apparent authority to apply, the petitioner was burdened to prove the following: (a) the acts of the
respondent justifying belief in the agency by the petitioner; (b) knowledge thereof by the respondent which is sought to be
held; and, (c) reliance thereon by the petitioner consistent with ordinary care and prudence.[34] In this case, there is no
evidence on record of specific acts made by the respondent[35] showing or indicating that it had full knowledge of any
representations made by Roxas to the petitioner that the respondent had authorized him to grant to the respondent an
option to buy a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085, or to create a burden or lien thereon, or that the
respondent allowed him to do so.
The petitioner's contention that by receiving and retaining the P5,000,000 purchase price of Lot No. 491-A-3-B-2, the
respondent effectively and impliedly ratified the grant of a right of way on the adjacent lot, Lot No. 491-A-3-B-1, and to grant
to the petitioner an option to sell a portion thereof, is barren of merit. It bears stressing that the respondent sold Lot No.
491-A-3-B-2 to the petitioner, and the latter had taken possession of the property. As such, the respondent had the right to
retain the P5,000,000, the purchase price of the property it had sold to the petitioner. For an act of the principal to be
considered as an implied ratification of an unauthorized act of an agent, such act must be inconsistent with any other
hypothesis than that he approved and intended to adopt what had been done in his name.[36] Ratification is based on
waiver the intentional relinquishment of a known right. Ratification cannot be inferred from acts that a principal has a right
to do independently of the unauthorized act of the agent. Moreover, if a writing is required to grant an authority to do a
particular act, ratification of that act must also be in writing.[37] Since the respondent had not ratified the unauthorized acts
of Roxas, the same are unenforceable.[38] Hence, by the respondent's retention of the amount, it cannot thereby be implied
that it had ratified the unauthorized acts of its agent, Roberto Roxas.
On the last issue, the petitioner contends that the CA erred in dismissing its complaint for damages against the respondent
on its finding that the delay in the construction of its warehouse was due to its (petitioner's) fault. The petitioner asserts that
the CA should have affirmed the ruling of the trial court that the respondent failed to cause the eviction of the squatters from
the property on or before September 29, 1991; hence, was liable for P5,660,000. The respondent, for its part, asserts that the
delay in the construction of the petitioner's warehouse was due to its late filing of an application for a building permit, only
on May 28, 1992.
The petitioner's contention is meritorious. The respondent does not deny that it failed to cause the eviction of the squatters
on or before September 29, 1991. Indeed, the respondent does not deny the fact that when the petitioner wrote the
respondent demanding that the latter cause the eviction of the squatters on April 15, 1992, the latter were still in the
premises. It was only after receiving the said letter in April 1992 that the respondent caused the eviction of the squatters,
which thus cleared the way for the petitioner's contractor to commence the construction of its warehouse and secure the
appropriate building permit therefor.
The petitioner could not be expected to file its application for a building permit before April 1992 because the squatters were
still occupying the property. Because of the respondent's failure to cause their eviction as agreed upon, the petitioner's
contractor failed to commence the construction of the warehouse in October 1991 for the agreed price of P8,649,000. In the
meantime, costs of construction materials spiraled. Under the construction contract entered into between the petitioner and
the contractor, the petitioner was obliged to pay P11,804,160,[39] including the additional work costing P1,441,500, or a net
increase of P1,712,980.[40] The respondent is liable for the difference between the original cost of construction and the
increase thereon, conformably to Article 1170 of the New Civil Code, which reads:
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Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay and those who in any
manner contravene the tenor thereof, are liable for damages.
The petitioner, likewise, lost the amount of P3,900,000 by way of unearned income from the lease of the property to the
Ponderosa Leather Goods Company. The respondent is, thus, liable to the petitioner for the said amount, under Articles 2200
and 2201 of the New Civil Code:
Art. 2200. Indemnification for damages shall comprehend not only the value of the loss suffered, but also that of the profits
which the obligee failed to obtain.
The Orientalist Company is a corporation, duly organized under the laws of the Philippine Islands, and in 1913 and
1914, the time of the occurrences which gave rise to this lawsuit, was engaged in the business of maintaining and
conducting a theatre in the city of Manila for the exhibition of cinematographic films. Under the articles of
incorporation the company is authorized to manufacture, buy, or otherwise obtain all accessories necessary for
conducting such a business. The plaintiff J. F. Ramirez was, at the same time, a resident of the city of Paris,
France, and was engaged in the business of marketing films for a manufacturer or manufacturers, there engaged
in the production or distribution of cinematographic material. In this enterprise the plaintiff was represented in the
city of Manila by his son, Jose Ramirez.

Art. 2201. In contracts and quasi-contracts, the damages for which the obligor who acted in good faith is liable shall be those
that are the natural and probable consequences of the breach of the obligation, and which the parties have foreseen or could
have reasonably foreseen at the time the obligation was constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages which may be
reasonably attributed to the non-performance of the obligation.
In the month of July, 1913, certain of the directors of the Orientalist Company, in Manila, became apprised of the
fact that the plaintiff in Paris had control of the agencies for two different marks of films, namely, the "Eclair Films"
and the "Milano Films;" and negotiations were begun with said officials of the Orientalist Company by Jose
Ramirez, as agent of the plaintiff, for the purpose of placing the exclusive agency of these films in the hands of the
Orientalist Company. The defendant Ramon J. Fernandez, one of the directors of the Orientalist Company and
also its treasure, was chiefly active in this matter, being moved by the suggestions and representations of Vicente
Ocampo, manage of the Oriental Theater, to the effect that the securing of the said films was necessary to the
success of the corporation.

In sum, we affirm the trial court's award of damages and attorney's fees to the petitioner.
Near the end of July of the year aforesaid, Jose Ramirez, as representative of his father, placed in the hands of
Ramon J. Fernandez an offer, dated July 4, 1913, stating detail the terms upon which the plaintiff would undertake
IN LIGHT OF ALL THE FOREGOING, judgment is hereby rendered AFFIRMING the assailed Decision of the Court of Appeals to supply from Paris the aforesaid films. This officer was declared to be good until the end of July; and as only
WITH MODIFICATION. The respondent is ordered to pay to the petitioner the amount of P5,612,980 by way of actual about for the Orientalist Company to act on the matter speedily, if it desired to take advantage of said offer.
damages and P100,000 by way of attorney's fees. No costs. Accordingly, Ramon J. Fernandez, on July 30, had an informal conference with all the members of the company's
board of directors except one, and with approval of those with whom he had communicated, addressed a letter to
Jose Ramirez, in Manila, accepting the offer contained in the memorandum of July 4th for the exclusive agency of
SO ORDERED.
the Eclair films. A few days later, on August 5, he addressed another letter couched in the same terms, likewise
accepting the office of the exclusive agency for the Milano Films.
Puno, (Chairman), Austria-Martinez, Tinga, and Chico-Nazario, JJ., concur.
The memorandum offer contained a statement of the price at which the films would be sold, the quantity which the
representative of each was required to take and information concerning the manner and intervals of time for the
respective shipments. The expenses of packing, transportation and other incidentals were to be at the cost of the
G.R. No. 11897 September 24, 1918 purchaser. There was added a clause in which J. F. Ramirez described his function in such transactions as that of
a commission agent and stated that he would see to the prompt shipment of the films, would pay the manufacturer,
J. F. RAMIREZ, plaintiff-appellee, and take care that the films were insured — his commission for such services being fixed at 5 per cent.
vs.
THE ORIENTALIST CO., and RAMON J. FERNANDEZ, defendants-appellants. What we consider to be the most portion of the two letters of acceptance written by R. J. Fernandez to Jose
Ramirez is in the following terms:
Jose Moreno Lacalle for appellant Fernandez.
Sanz, Opisso & Luzuriaga for appellant "The Orientalist Co." We willingly accepted the officer under the terms communicated by your father in his letter dated at Paris
No appearance for appellee. on July 4th of the present year.

STREET, J.:

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These communications were signed in the following form, in which it will be noted the separate signature of R. J.
Fernandez, as an individual, is placed somewhat below and to the left of the signature of the Orientalist Company
as singed by R. J. Fernandez, in the capacity of treasurer:
THE ORIENTALIST COMPANY,
By R. J. FERNANDEZ,
Treasurer,
R. J. FERNANDEZ.
Both of these letters also contained a request that Jose Ramirez should at once telegraph to his father in Paris that
his offer had been accepted by the Orientalist Company and instruct him to make a contract with the film
companies, according to the tenor of the offer, and in the capacity of attorney-in-fact for the Orientalist Company.
The idea behind the latter suggestion apparently was that the contract for the films would have to be made directly
between the film-producing companies and the Orientalist Company; and it seemed convenient, in order to save
time, that the Orientalist Company should clothed J. F. Ramirez with full authority as its attorney-in-fact. This idea
was never given effect; and so far as the record shows, J. F. Ramirez himself procured the films upon his own
responsibility, as he indicated in the officer of July 4 that he would do, with the result that the only contracting
parties in this case are J. F. Ramirez of the one part, and the Orientalist Company, with Ramon J. Fernandez of the
other.
In due time the films began to arrive in Manila, a draft for the cost and expenses incident to each shipment being
attached to the proper bill of lading. It appears that the Orientalist Company was without funds to meet these
obligations and the first few drafts were dealt with in the following manner: The drafts, upon presented through the
bank, were accepted in the name of the Orientalist Company by its president B. Hernandez, and were taken up by
the latter with his own funds. As the drafts had thus been paid by B. Hernandez, the films which had been procured
by he payment of said drafts were treated by him as his own property; and they in fact never came into the actual
possession of the Orientalist Company as owner at all, though it is true Hernandez rented the films to the
Orientalist Company and they were exhibited by it in the Oriental Theater under an arrangement which was made
between him and the theater's manager.
During the period between February 27, 1914, and April 30, 1914, there arrived in the city of Manila several
remittances of films from Paris, and it is these shipments which have given occasion for the present action. All of
the drafts accompanying these films were drawn, as on former occasions, upon the Orientalist Company; and all
were accepted in the name of B. Hernandez, except the last, which was accepted by B. Hernandez individually.
None of the drafts thus accepted were taken up by the drawee or by B. Hernandez when they fell due; and it was
finally necessary for the plaintiff himself to take them up as dishonored by non-payment.
Thereupon this action was instituted by the plaintiff on May 19, 1914, against the Orientalist Company, and Ramon
J. Fernandez. As the films which accompanied the dishonored were liable to deteriorate, the court, upon
application of the plaintiff, and apparently without opposition on the part of the defendants, appointed a receiver
who took charge of the films and sold them. The amount realized from this sale was applied to the satisfaction of
the plaintiff's claim and was accordingly delivered to him in part payment thereof. At trial judgment was given for
the balance due to the plaintiff, namely P6,018.93, with interest from May 19, 1914, the date of the institution of the
action. In the judgment of the trial court the Orientalist Company was declared to be a principal debtor and Ramon
J. Fernandez was declared to be liable subsidiarily as guarantor. From this judgment both of the parties defendant
appealed.
In this Court neither of the parties appellant make any question with respect to the right of the plaintiff to recover
from somebody the amount awarded by the lower court; but each of the defendants insists the other is liable for
the whole. It results that the real contention upon this appeal is between the two defendants.
It is stated in the brief of the appellant Ramon J. Fernandez and the statement is not challenged by the Orientalist
Company that the judgment has already been executed as against the company is exclusively and primarily liable
the entire indebtedness, the question as to the liability of Ramon J. Fernandez would be academic. But if the latter
is liable as principal obligor for the whole or any part of the debt, it will be necessary to modify the judgment in
order to adjust the rights of the defendants in accordance with such finding.
It will be noted that the action is primarily founded upon the liability created by the letters dated July 30th and
August 5, 1913, in connection with the plaintiff's offer of July 4, 1913; and both of the letters mentioned are copied
into the complaint as the foundation of the action. The action is not based upon the dishonored drafts which were
accepted by B. Hernandez in the name of the Orientalist Company; and although these drafts, as well as the last
draft, which was accepted by B. Hernandez individually, have been introduced in evidence, this was evidently done
for the purpose of proving the amount of damages which the plaintiff was entitled to recover.
In the discussion which is to follow we shall consider, first, the question of the liability of the corporation upon the
contracts contained in the letters of July 30 and August 5, 1913, and, secondly the question of the liability of
Ramon J. Fernandez, based upon his personal signature to the same documents.
As to the liability of the corporation a preliminary point of importance arises upon the pleadings. The action, as
already stated, is based upon documents purporting to be signed by the Orientalist Company, and copies of the
documents are set out in the complaint. It was therefore incumbent upon the corporation, if it desired to question
the authority of Fernandez to bind it, to deny the due execution of said contracts under oath, as prescribed in
section 103 of the Code of Civil procedure. Said section, in the part pertinent to the situation now under
consideration, reads as follows:
When an action is brought upon a written instrument and the complaint contains or has annexed or has
annexed a copy of such instrument, the genuineness and due execution of the instrument shall be
deemed admitted, unless specifically denied under oath in the answer.
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No sworn answer denying the genuineness and due execution of the contracts in question or questioning the
authority of Ramon J. Fernandez to bind the Orientalist Company was filed in this case; but evidence was admitted
without objection from the plaintiff, tending to show that Ramon J. Fernandez had no such authority. This evidence
consisted of extracts from the minutes of the proceedings of the company's board of directors and also of extracts
from the minutes of the proceedings of the company's stockholders, showing that the making of this contract had
been under consideration in both bodies and that the authority to make the same had been withheld by the
stockholders. It therefore becomes necessary for us to consider whether the administration resulting from the
failure of the defendant company to deny the execution of the contracts under oath is binding upon it for all
purposes of this lawsuit, or whether such failure should be considered a mere irregularity of procedure which was
waived when the evidence referred to was admitted without objection from the plaintiff. The proper solution of this
problem makes it necessary to consider carefully the principle underlying the provision above quoted.
That the situation was one in which an answer under oath denying the authority of the agent should have been
interposed, supposing that the company desired to contest this point, is not open to question. In the case of
Merchant vs. International Banking Corporation, (6 Phil. Rep., 314), it appeared that one Brown has signed the
name of the defendant bank as guarantor of a promissory note. The bank was sued upon this guaranty and at the
hearing attempted to prove that Brown had no authority to bind the bank by such contract. It was held that buy
failing to deny the contract under oath, the bank had admitted the genuineness and due execution thereof, and that
this admission extended not only to the authenticity of the signature of Brown but also to his authority. Said Justice
Willard: "The failure of the defendant to deny the genuineness and due execution of this guaranty under oath was
an admission not only of the signature of Brown, but also his authority to make the contract in behalf of the
defendant and of the power the contract in behalf of the defendant and of the power of the defendant to enter into
such a contract.
The rule thus stated is in entire accord with the doctrine prevailing in the United States, as will be seen by
reference to the following, among other authorities:
The case of Barrett Mining Co. vs. Tappan (2 Colo., 124) was an action against a mining corporation upon an
appeal bond. The name of the company had been affixed to the obligation by an agent, and no sufficient affidavit
was filed by the corporation questioning its signature or the authority of the agent to bind the company. It was held
that the plaintiff did not have to prove the due execution of the bond and that the corporation as to be taken as
admitting the authority of the agent to make the signature. Among other things the court said: "But it is said that the
authority of Barrett to execute the bond is distinguishable from the signing and, although the signature must be
denied under oath, the authority of the agent need not be. Upon this we observe that the statute manifestly refers
to the legal effect of the signature, rather than the manual act of singing. If the name of the obligor, in a bond, is
subscribed by one in his presence, and by his direction, the effect is the same as if his name should be signed with
his own hand, and under such circumstances we do not doubt that the obligor must deny his signature under oath,
in order to put the obligee to proof of the fact. Quit facit per aliam facit per se, and when the name is signed by one
thereunto authorized, it is as much as the signature of the principal as if written with his own hand. Therefore, if the
principal would deny the authority of the agent, as the validity of the signature is thereby directly attacked, the
denial must be under oath.
In Union Dry Company vs. Reid (26 Ga., 107), an action was brought upon a promissory note purporting to have
been given by on A. B., as the treasurer of the defendant company. Said the court: "Under the Judiciary Act of
1799, requiring the defendant to deny on oath an instrument of writing, upon which he is sued, the plea in this case
should have been verified.
If the person who signed this note for the company, and upon which they are sued, was not authorized to make it,
let them say so upon oath, and the onus is then on the plaintiff to overcome the plea."
It should be noted that the provision contained in section 103 of our Code of Civil Procedure is embodied in some
form or other in the statutes of probably all of the American States, and it is not by any means peculiar to the laws
of California, though it appears to have been taken immediately from the statutes of that State. (Secs. 447, 448,
California Code of Civil Procedure.)
There is really a broader question here involved than that which relates merely to the formality of verifying the
answer with an affidavit. This question arises from the circumstance that the answer of the corporation does not in
any was challenge the authority of Ramon J. Fernandez to bind it by the contracts in question and does not set
forth, as a special defense, any such lack of authority in him. Upon well-established principles of pleading lack of
authority in an officer of a corporation to bind it by a contract executed by him in its name is a defense which
should be specially pleaded — and this quite apart from the requirement, contained in section 103, that the answer
setting up such defense should be verified by oath. But is should not here escape observation that section 103
also requires — in denial contemplated in that section shall be specific. An attack on the instrument in general
terms is insufficient, even though the answer is under oath. (Songco vs. Sellner, 37 Phil. Rep., 254.)
In the first edition of a well-known treatise on the laws of corporations we find the following proposition:
If an action is brought against a corporation upon a contract alleged to be its contract, if it desires to set
up the defense that the contract was executed by one not authorized as its agent, it must plead non est
factum. (Thompson on Corporations, 1st ed., vol. 6, sec. 7631.)
Again, says the same author:
A corporation can not avail itself of the defense that it had no power to enter into the obligation to enforce
which the suit is brought, unless it pleads that defense. This principle applies equally where the
defendant intends to challenge the power of its officer or agent to execute in its behalf the contract upon
which the action brought and where it intends to defend on the ground of total want of power in the
corporation to make such a contract. (Opus citat. sec. 7619.)
In Simon vs. Calfee (80 Ark., 65), it was said:
Though the power of the officers of a business corporation to issue negotiable paper in its name is not
presumed, such corporation can not avail itself of a want of power in its officers to bind it unless the
defense was made on such ground.
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The rule has been applied where the question was whether corporate officer, having admitted power to make a
contract, had in the particular instance exceeded that authority, (Merill vs. Consumers' Coal Co., 114 N.Y., 216);
and it has been held that where the answer in a suit against a corporation on its note relies simply on the want of
power of the corporation to issue notes, the defendant can not afterwards object that the plaintiff has not shown
that the officer executing the note were empowered to do so. (Smith vs. Eureka Flour Mills Co., 6 Cal., 1.)
The reason for the rule enunciated in the foregoing authorities will, we think, be readily appreciated. In dealing with
corporations the public at large is bound to rely to a large extent upon outward appearances. If a man is found
acting for a corporation with the external indicia of authority, any person, not having notice of want of authority, may
usually rely upon those appearances; and if it be found that the directors had permitted the agent to exercise that
authority and thereby held him out as a person competent to bind the corporation, or had acquiesced in a contract
and retained the benefit supposed to have been conferred by it, the corporation will be bound, notwithstanding the
actual authority may never have been granted. The public is not supposed nor required to know the transactions
which happen around the table where the corporate board of directors or the stockholders are from time to time
convoked. Whether a particular officer actually possesses the authority which he assumes to exercise is frequently
known to very few, and the proof of it usually is not readily accessible to the stranger who deals with the
corporation on the faith of the ostensible authority exercised by some of the corporate officers. It is therefore
reasonable, in a case where an officer of a corporation has made a contract in its name, that the corporation
should be required, if it denies his authority, to state such defense in its answer. By this means the plaintiff is
apprised of the fact that the agent's authority is contested; and he is given an opportunity to adduce evidence
showing either that the authority existed or that the contract was ratified and approved.
We are of the opinion that the failure of the defendant corporation to make any issue in its answer with regard to
the authority of Ramon J. Fernandez to bind it, and particularly its failure to deny specifically under oath the
genuineness and due execution of the contracts sued upon, have the effect of elimination the question of his
authority from the case, considered as a matter of mere pleading. The statute (sec. 103) plainly says that if a
written instrument, the foundation of the suit, is not denied upon oath, it shall be deemed to be admitted. It is
familiar doctrine that an admission made in a pleading can not be controverted by the party making such
admission; and all proof submitted by him contrary thereto or inconsistent therewith should simply be ignored by
the court, whether objection is interposed by the opposite party or not. We can see no reason why a constructive
admission, created by the express words of the statute, should be considered to have less effect than any other
admission.
The parties to an action are required to submit their respective contentions to the court in their complaint and
answer. These documents supply the materials which the court must use in order to discover the points of
contention between the parties; and where the statute says that the due execution of a document which supplies
the foundation of an action is to be taken as admitted unless denied under oath, the failure of the defendant to
make such denial must be taken to operate as a conclusive admission, so long as the pleadings remain that form.
It is true that it is declared in section 109 of the Code of Civil Procedure that immaterial variances between the
allegations of a pleading and the proof shall be disregarded and the facts shall be found according to the evidence.
The same section, however, recognizes the necessity for an amendment of the pleadings. And judgment must be
in conformity with the case made in conformity with the case made in the pleadings and established by the proof,
and relief can not be granted that is substantially inconsistent with either. A party can no more succeed upon a
case proved but not alleged than upon a case alleged but nor proved. This rule of course operates with like effect
upon both parties, and applies equality to the defendants special defense as to the plaintiffs cause of action.
Of course this Court, under section 109 of the Code of Civil Procedure, has authority even now to permit the
answer of the defendant to be amended; and if we believed that the interests of justice so required, we would
either exercise that authority or remand the cause for a new trial in court below. As will appear further on in this
opinion, however, we think that the interests of justice will best be promoted by deciding the case, without more
ado, upon the issues presented in the record as it now stands.
That we may not appear to have overlooked the matter, we will observe that two cases are cited from California in
which the Supreme Court of the State has held that where a release is pleaded by way of defense and evidence
tending to destroy its effect is introduced without objection, the circumstance that it was not denied under oath is
immaterial. In the earlier of these cases, Crowley, vs. Railroad Co. (60 Cal., 628), an action was brought against a
railroad company to recover damages for the death of the plaintiff's minor son, alleged to have been killed by the
negligence of the defendant. The defendant company pleaded by way of defense a release purporting to be signed
by the plaintiff, and in its answer inserted a copy of the release. The execution of the release was not denied under
oath; but at the trial evidence was submitted on behalf of the plaintiff tending to show that at the time he signed the
release, he was incompetent by reason of drunkenness to bind himself thereby. It was held that inasmuch as this
evidence had been submitted by the plaintiff without objection, it was proper for the court to consider it. We do not
question the propriety of that decision, especially as the issue had been passed upon by a jury; but we believe that
the decision would have been more soundly planted if it had been said that the incapacity of the plaintiff, due to his
drunken condition, was a matter which did not involve either the genuineness or due execution of the release. Like
the defenses of fraud, coercion, imbecility, and mistake, it was a matter which could be proved under the general
issue and did not have to be set up in a sworn reply. (Cf. Moore vs. Copp, 119 Cal., 429, 432, 433.) A somewhat
similar explanation can, we think, be given of the case of Clark vs. Child in which the rule declared in the earlier
case was followed. With respect to both decisions which we merely observe that upon point of procedure which
they are supposed to maintain, the reasoning of the court is in our opinion unconvincing.
We shall now consider the liability of the defendant company on the merits just as if that liability had been properly
put in issue by a specific answer under oath denying the authority of Fernandez go to bind it. Upon this question it
must at the outset be premised that Ramon J. Fernandez, as treasurer, had no independent authority to bind the
company by signing its name to the letters in question. It is declared by signing its name to the letters in question.
It is declared in section 28 of the Corporation Law that corporate power shall be exercised, and all corporate
business conducted by the board of directors; and this principle is recognized in the by-laws of the corporation in
question which contain a provision declaring that the power to make contracts shall be vested in the board of
directors. It is true that it is also declared in the same by-laws that the president shall have the power, and it shall
be his duty, to sign contract; but this has reference rather to the formality of reducing to proper form the contract
which are authorized by the board and is not intended to confer an independent power to make contract binding on
the corporation.
The fact that the power to make corporate contract is thus vested in the board of directors does not signify that a
formal vote of the board must always be taken before contractual liability can be fixed upon a corporation; for the
board can create liability, like an individual, by other means than by a formal expression of its will. In this
connection the case of Robert Gair Co. vs. Columbia Rice Packing Co. (124 La., 194) is instructive. If there
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appeared that the secretary of the defendant corporation had signed an obligation on its behalf binding it as
guarantor of the performance of an important contract upon which the name of another corporation appeared as
principal. The defendant company set up by way of defense that is secretary had no authority to bind it by such an
engagement. The court found that the guaranty was given with the knowledge and consent of the president and
directors, and that this consent of the president and directors, and that this consent was given with as much
observance of formality as was customary in the transaction of the business of the company. It was held that, so
far as the authority of the secretary was concerned, the contract was binding. In discussing this point, the court
quoted with approval the following language form one of its prior decisions:
The authority of the subordinate agent of a corporation often depends upon the course of dealings which
the company or its director have sanctioned. It may be established sometimes without reference to
official record of the proceedings of the board, by proof of the usage which the company had permitted
to grow up in business, and of the acquiescence of the board charged with the duty of supervising and
controlling the company's business.
It appears in evidence, in the case now before us, that on July 30, the date upon which the letter accepting the
offer of the Eclair films was dispatched the board of directors of the Orientalist Company convened in special
session in the office of Ramon J. Fernandez at the request of the latter. There were present the four members,
including the president, who had already signified their consent to the making of the contract. At this meeting, as
appears from the minutes, Fernandez informed the board of the offer which had been received from the plaintiff
with reference to the importation of films. The minutes add that terms of this offer were approved; but at the
suggestion of Fernandez it was decided to call a special meeting of the stockholders to consider the matter and
definite action was postponed.
The stockholders meeting was convoked upon September 18, 1913, upon which occasion Fernandez informed
those present of the offer in question and of the terms upon which the films could be procured. He estimated that
the company would have to make an outlay of about P5,500 per month, if the offer for the two films should be
accepted by it.
The following extracts from the minutes of this meeting are here pertinent:
Mr. Fernandez informed the stockholders that, in view of the urgency of the matter and for the purpose of
avoiding that other importers should get ahead of the corporation in this regard, he and Messrs. B.
Hernandez, Leon Monroy, and Dr. Papa met for the purpose of considering the acceptance of the offer
together with the responsibilities attached thereto, made to the corporation by the film manufacturers
of Eclair and Milano of Paris and Italy respectively, inasmuch as the first shipment of films was then
expected to arrive.
At the same time he informed the said stockholders that he had already made arrangements with
respect to renting said films after they have been once exhibited in the Cine Oriental, and that the
corporation could very well meet the expenditure involved and net a certain profit, but that, if we could
enter into a contract with about nine cinematographs, big gains would be obtained through such a step.
The possibility that the corporation might not see fit to authorize the contract, or might for lack of funds be unable
to make the necessary outlay, was foreseen; and in such contingency the stockholders were informed, that the four
gentlemen above mentioned (Hernandez, Fernandez, Monroy, and Papa) "would continue importing said films at
their own account and risk, and shall be entitled only to a compensation of 10 per cent of their outlay in importing
the films, said payment to be made in shares of said corporation, inasmuch as the corporation is lacking available
funds for the purpose, and also because there are 88 shares of stock remaining still unsold."
In view of this statement, the stockholders adopted a resolution to the effect that the agencies of the Eclair and
Milano films should be accepted, if the corporation could obtain the money with which to meet the expenditure
involved, and to this end appointed a committee to apply to the bank for a credit. The evidence shows that an
attempt was made, on behalf of the corporation, to obtain a credit of P10,000 from the Bank of the Philippine
Islands for the purpose indicated, but the bank declined to grant his credit. Thereafter another special meeting of
the shareholders of the defendant corporation was called at which the failure of their committee to obtain a credit
from the bank was made known. A resolution was thereupon passed to the effect that the company should pay to
Hernandez, Fernandez, Monroy, and Papa an amount equal to 10 per cent of their outlay in importing the films,
said payment to be made in shares of the company in accordance with the suggestion made at the previous
meeting. At the time this meeting was held three shipment of the films had already been received in Manila.
We believe it is a fair inference from the recitals of the minutes of the stockholders meeting of September 18, and
especially from the first paragraph above quoted, that this body was then cognizant that the officer had already
been accepted in the name of the Orientalist Company and that the films which were then expected to arrive were
being imported by virtue of such acceptance. Certainly four members of the board of directors there present were
aware of this fact, as the letter accepting the offer had been sent with their knowledge and consent. In view of this
circumstance, a certain doubt arises whether they meant to utilize the financial assistance of the four so-called
importers in order that the corporation might bet the benefit of the contract for the films, just as it would have
utilized the credit of the bank if such credit had been extended. If such was the intention of the stockholders their
action amounted to a virtual, though indirect, approval of the contract. It is not however, necessary to found the
judgment on this interpretation of the stockholders proceedings, inasmuch as we think for reasons presently to be
stated, that the corporation is bound, and we will here assume that in the end the contract were not approved by
the stockholders.
It will be observed that Ramon J. Fernandez was the particular officer and member of the board of directors who
was most active in the effort to secure the films for the corporation. The negotiations were conducted by him with
the knowledge and consent of other members of the board; and the contract was made with their prior approval. As
appears from the papers in this record, Fernandez was the person to who keeping was confided the printed
stationery bearing the official style of the corporation, as well as rubber stencil with which the name of the
corporation could be signed to documents bearing its name.
Ignoring now, for a moment, the transactions of the stockholders, and reverting to the proceedings of the board of
directors of the Orientalist Company, we find that upon October 27, 1913, after Fernandez had departed from the
Philippine Islands, to be absent for many months, said board adopted a resolution conferring the following among
other powers on Vicente Ocampo, the manager of the Oriental theater, namely:
(1) To rent a box for the films in the "Kneeler Building."
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(4) To be in charge of the films and of the renting of the same.
(5) To advertise in the different newspapers that we are importing films to be exhibited in the Cine
Oriental.
(6) Not to deliver any film for rent without first receiving the rental therefor or the guaranty for the
payment thereof.
(7) To buy a book and cards for indexing the names of the films.
(10) Upon the motion of Mr. Ocampo, it was decided to give ample powers to the Hon. R. Acuña to enter
into agreements with cinematograph proprietors in the provinces for the purpose of renting films from us.
It thus appears that the board of directors, before the financial inability of the corporation to proceed with the
project was revealed, had already recognized the contract as being in existence and had proceeded to take the
steps necessary to utilize the films. Particularly suggestive is the direction given at this meeting for the publication
of announcements in the newspapers to the effect that the company was engaged in importing films. In the light of
all the circumstances of the case, we are of the opinion that the contracts in question were thus inferentially
approved by the company's board of directors and that the company is bound unless the subsequent failure of the
stockholders to approve said contracts had the effect of abrogating the liability thus created.
Both upon principle and authority it is clear that the action of the stockholders, whatever its character, must be
ignored. The functions of the stockholders of a corporation are, it must be remembered, of a limited nature. The
theory of a corporation is that the stockholders may have all the profits but shall turn over the complete
management of the enterprise to their representatives and agents, called directors. Accordingly, there is little for
the stockholders to do beyond electing directors, making by-laws, and exercising certain other special powers
defined by-law. In conformity with this idea it is settled that contract between a corporation and third person must
be made by the director and not by the stockholders. The corporation, in such matters, is represented by the
former and not by the latter. (Cook on Corporations, sixth ed., secs. 708, 709.) This conclusion is entirely
accordant with the provisions of section 28 of our Corporation Law already referred to. It results that where a
meeting of the stockholders is called for the purpose of passing on the propriety of making a corporate contract, its
resolutions are at most advisory and not in any wise binding on the board.
In passing upon the liability of a corporation in cases of this kind it is always well to keep in mind the situation as it
presents itself to the third party with whom the contract is made. Naturally he can have little or no information as to
what occurs in corporate meetings; and he must necessarily rely upon the external manifestations of corporate
consent. The integrity of commercial transactions can only be maintained by holding the corporation strictly to the
liability fixed upon it by its agents in accordance with law, and we would be sorry to announce a doctrine which
would permit the property of a man in the city of Paris to be whisked out of his hands and carried into a remote
quarter of the earth without recourse against the corporations whose name and authority had been used in the
manner disclosed in this case. As already observed, it is familiar doctrine that if a corporation knowingly permits
one of its officer, or any other agent, to do acts within the scope of an apparent authority, and thus hold him out to
the public as possessing power to do those acts, the corporation will as against any one who has in good faith
dealt with the corporation through such agent, be estopped from denying his authority; and where it is said "if the
corporation permits" this means the same as "if the thing is permitted by the directing power of the corporation."
It being determined that the corporation is bound by the contract in question, it remains to consider the character of
the liability assumed by R. J. Fernandez, in affixing his personal signature to said contract. The question here is
whether Fernandez is liable jointly with the Orientalists Company as a principal obligor, or whether his liability is
that of a guarantor merely.
As appears upon the face of the contracts, the signature of Fernandez, in his individual capacity, is not in line with
the signature of the Orientalist Company, but is set off to the left of the company's signature and somewhat who
sign contracts in some capacity other than that of principal obligor to place their signature alone would justify a
court in holding that Fernandez here took upon himself the responsibility of a guarantor rather than that of a
principal obligor. We do, however, think, that the form in which the contract is signed raises a doubt as to what the
real intention was; and we feel justified, in looking to the evidence to discover that intention. In this connection it is
entirely clear, from the testimony of both Ramirez and Ramon J. Fernandez, that the responsibility of the latter was
intended to be that of guarantor. There is, to be sure, a certain difference between these witnesses as to the nature
of this guaranty, inasmuch as Fernandez would have us believe that his name was signed as a guaranty that the
contract would be approved by the corporation, while Ramirez says that the name was put on the contract for the
purpose of guaranteeing, not the approval of the contract, but its performance. We are convinced that the latter
was the real intention of the contracting parties.
We are not unmindful of the force of that rule of law which declares that oral evidence is admissible to show the
character in which the signature was affixed. This conclusion is perhaps supported by the language of the second
paragraph of article 1281 of the Civil Code, which declares that if the words of a contract should appear contrary to
the evident intention of the parties, the intention shall prevail. But the conclusion reached is, we think, deducible
from the general principle that in case of ambiguity parol evidence is admissible to show the intention of the
contracting parties.
It should be stated in conclusion that as the issues in this case have been framed, the only question presented to
this court is: To what extent are the signatory parties to the contract liable to the plaintiff J. F. Ramirez? No
contentious issue is raised directly between the defendants, the Orientalist Company and Ramon H. Fernandez;
nor does the present the present action involve any question as to the undertaking of Fernandez and his three
associates to effect the importation of the films upon their own account and risk. Whether they may be bound to
hold the company harmless is a matter upon which we express no opinion.
The judgment appealed from is affirmed, with costs equally against the two appellant. So ordered.
Torres, Johnson, Malcolm, Avanceña and Fisher, JJ., concur.
THIRD DIVISION
G.R. No. L-53820 June 15, 1992
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YAO KA SIN TRADING, owned and operated by YAO KA SIN, petitioner, 5). Delivery Schedule — Shipment be made within four (4) days upon receipt of your shipping instruction.
vs.
HONORABLE COURT OF APPEALS and PRIME WHITE CEMENT CORPORATION, represented by its President-Chairman, 6). Bag/Container — a) All be made of Standard Kraft (water resistant paper, 4 ply, with bursting strength of 220
CONSTANCIO B. MALAGNA, respondents. pounds, and b) Breakage allowance — additional four percent (4%) over the quantity of each shipment.

7). Terms of Payment — Down payment of PESOS: TWO HUNDRED FORTY THREE THOUSAND (P243,000.00) payable
DAVIDE, JR., J.: on the signing of this contract and the balance to be paid upon presentation of corresponding shipping documents.

Assailed in this petition for review is the decision of the respondent Court of Appeals in C.A.-G.R. No. 61072-R, 1 promulgated
on 21 December 1979, reversing the decision 2 of the then Court of First Instance (now Regional Trial Court) of Leyte dated
20 November 1975 in Civil Case No. 5064 entitled "Yao Ka Sin Trading versus Prime White Cement Corporation."
The root of this controversy is the undated letter-offer of Constancio B. Maglana, President and Chairman of the Board of
private respondent Prime White Cement Corporation, hereinafter referred to as PWCC, to Yao Ka Sin Trading, hereinafter
referred to as YKS, which describes itself as "a business concern of single proprietorship," 3 and is represented by its
manager, Mr. Henry Yao; the letter reads as follows:
PRIME WHITE CEMENT CORPORATION
602 Cardinal Life Building
Herran Street, Manila
It is understood that in the event of a delay in our shipment, you hold the option to discount any price differential resulting
from a lower market price vis-a-vis the contract price. In addition, grant (sic) you the option to extend this contract until the
complete delivery of Forty Five Thousand (45,000) bags of 94 lbs. each is made by us. You are also hereby granted the option
to renew this contract under the same price, terms and conditions.
Please countersign on the space provided for below as your acknowledgement and confirmation of the above transaction.
Thank You.
Very truly yours,
PRIME WHITE CEMENT CORPORATION
BY: (SGD) CONSTANCIO B. MAGLANA

Yao Ka Sin President & Chairman

Tacloban City
CONFORME:
Gentlemen:
YAO KA SIN TRADING
We have the pleasure to submit hereby our firm offer to you under the following quotations, terms, and conditions, to wit: BY: (SGD) HENRY YAO

1). Commodity — Prime White Cement WITNESSES:

2). Price — At your option: a) P24.30 per 94 lbs. bag net, FOB Cebu City; and b) P23.30 per 94 lbs. bag net, FOB (SGD) T. CATINDIG (SGD) ERNESTO LIM
Asturias Cebu.
RECEIVED from Mr. Henry Yao of Yao Ka Sin Trading, in pursuance of the above offer, the sum of Pesos: TWO HUNDRED
3). Quality — As fully specified in certificate No. 224-73 by Bureau of Public Works, Republic of the Philippines. FORTY THREE THOUSAND ONLY (P243,000.00) in the form of Producers' Bank of the Philippines Check No. C-153576 dated
June 7, 1973.
4). Quantity — Forty-five Thousand (45,000) bags at 94 lbs. net per bag withdrawable in guaranteed monthly quantity
of Fifteen Thousand (15,000) bags minimum effective from June, 1973 to August 1973. PRIME WHITE CEMENT CORPORATION

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BY:
(SGD) CONSTANCIO B. MAGLANA
President & Chairman 4
This letter-offer, hereinafter referred to as Exhibit "A", was prepared, typed and signed on 7 June 1973 in the office of Mr.
Teodoro Catindig, Senior Vice-President of the Consolidated Bank and Trust Corporation (Solid Bank). 5
The principal issue raised in this case is whether or not the aforesaid letter-offer, as accepted by YKS, is a contract that binds
the PWCC. The trial court rule in favor of the petitioner, but the respondent Court held otherwise.
The records disclose the following material operative facts:
In its meeting in Cebu City on 30 June 1973, or twenty-three (23) days after the signing of Exhibit "A", the Board of Directors
of PWCC disapproved the same; the rejection is evidenced by the following Minutes (Exhibit "10"):
the 10,000 bags of white cement sold to Yao Ka Sin Trading is sold not because of the alledged letter-contract adhered to by
them, but must be understood as a new and separate contract, and has in no way to do with the letter-offer which they (sic)
as consummated is by this resolution totally disapproved and is unacceptable to the corporation.
On 5 July 1973, PWCC wrote a letter (Exhibit "1") to YKS informing it of the disapproval of Exhibit "A". Pursuant, however, to
its decision with respect to the 10,000 bags of cement, it is issued the corresponding Delivery Order (Exhibit "4") and Official
Receipt No. 0394 (Exhibit "5") for the payment of the same in the amount of P243,000.00 This is the same amount received
and acknowledged by Maglana in Exhibit "A".
YKS accepted without protest both the Delivery and Official Receipts.
While YKS denied having received a copy of Exhibit "1", it was established that the original thereof was shown to Mr. Henry
Yao; since no one would sign a receipt for it, the original was left at the latter's office and this fact was duly noted in Exhibit
"1" (Exhibit "l-A").
On 4 August 1973, PWCC wrote a letter (Exhibit "2") to YKS in answer to the latter's 4 August 1973 letter stating that it is
"withdrawing or taking delivery of not less than 10,000 bags of white cement on August 6-7, 1973 at Asturias, Cebu, thru
M/V Taurus." In said reply, PWCC reminded YKS of its (PWCC's) 5 July 1973 letter (Exhibit "1") and told the latter that PWCC
"only committed to you and which you correspondingly paid 10,000 bags of white cement of which 4,150 bags were already
delivered to you as of August 11, 1973. 6 Unfortunately, no copy of the said 4 August 1973 letter of YKS was presented in
evidence.
On 21 August 1973, PWCC wrote another letter (Exhibit "3") 7 to YKS in reply to the latter's letter of 15 August 1973. Enclosed
in the reply was a copy of Exhibit "2". While the records reveal that YKS received this reply also on 21 August 1973 (Exhibit
"3" "A"), 8 it still denied having received it. Likewise, no copy of the so-called 15 August 1973 letter was presented in
evidence.
On 10 September 1973, YKS, through Henry Yao, wrote a letter 9 to PWCC as a follow-up to the letter of 15 August 1973; YKS
insisted on the delivery of 45,030 bags of white cement. 10
On 12 September 1973, Henry Yao sent a letter (Exhibit "G") to PWCC calling the latter's attention to the statement of
delivery dated 24 August 1973, particularly the price change from P23.30 to P24.30 per 94 lbs. bag net FOB Asturias, Cebu.
11
On 2 November 1973, YKS sent a telegram (Exhibit "C") 12 to PWCC insisting on the full compliance with the terms of Exhibit
"A" and informing the latter that it is exercising the option therein stipulated.
On 3 November 1973, YKS sent to PWCC a letter (Exhibit "D") as a follow-up to the 2 November 1973 telegram, but this was
returned to sender as unclaimed. 13
As of 7 December 1973, PWCC had delivered only 9,775 bags of white cement.
On 9 February 1974, YKS wrote PWCC a letter (Exhibit "H") requesting, for the last time, compliance by the latter with its
obligation under
Exhibit "A". 14
On 27 February 1974, PWCC sent an answer (Exhibit "7") to the aforementioned letter of 9 February 1974; PWCC reiterated
the unenforceability of Exhibit "A". 15
On 4 March 1974, YKS filed with the then Court of First Instance of Leyte a complaint for Specific Performance with Damages
against PWCC. The complaint 16 was based on Exhibit "A" and was docketed as Civil Case No. 5064.
In its Answer with Counterclaim 17 filed on 1 July 1974, PWCC denied under oath the material averments in the complaint
and alleged that: (a) YKS "has no legal personality to sue having no legal personality even by fiction to represent itself;" (b)
Mr. Maglana, its President and Chairman, was lured into signing Exhibit "A"; (c) such signing was subject to the condition that
Exhibit "A" be approved by the Board of Directors of PWCC, as corporate commitments are made through it; (d) the latter
disapproved it, hence Exhibit "A" was never consummated and is not enforceable against PWCC; (e) it agreed to sell 10,000
bags of white cement, not under Exhibit "A", but under a separate contract prepared by the Board; (f) the rejection by the
Board of Exhibit "A" was made known to YKS through various letters sent to it, copies of which were attached to the Answer
as Annexes 1, 2 and 3; 18 (g) YKS knew, per Delivery Order 19 and Official Receipt 20 issued by PWCC, that only 10;000 bags
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were sold to it without any terms or conditions, at P24.30 per bag FOB Asturias, Cebu; (h) YKS is solely to blame for the
failure to take complete delivery of 10,000 bags for it did not send its boat or truck to PWCC's plant; and (i) YKS has,
therefore, no cause of action.
In its Counterclaim, PWCC asks for moral damages in the amount of not less than P10,000.00, exemplary damages in the sum
of P500,000.00 and attorney's fees in the sum of P10,000.00.
On 24 July 1974, YKS filed its Answer to the Counterclaim. 21
Issues having been joined, the trial court conducted a pre-trial. 22 On that occasion, the parties admitted that according to
the By-Laws of PWCC, the Chairman of the Board, who is also the President of the corporation, "has the power to execute
and sign, for and in behalf of the corporation, all contracts or agreements which the corporation enters into," subject to the
qualification that "all the president's actuations, prior to and after he had signed and executed said contracts, shall be given
to the board of directors of defendant Corporation." Furthermore, it was likewise stated for the record "that the corporation
is a semi-subsidiary of the government because of the NIDC participation in the same, and that all contracts of the
corporation should meet the approval of the NIDC and/or the PNB Board because of an exposure and financial involvement
of around P10 million therein. 23
During the trial, PWCC presented evidence to prove that Exhibit "A" is not binding upon it because Mr. Maglana was not
authorized to make the offer and sign the contract in behalf of the corporation. Per its By-Laws (Exhibit "8"), only the Board
of Directors has the power . . . (7) To enter into (sic) agreement or contract of any kind with any person in the name and for
and in behalf of the corporation through its President, subject only to the declared objects and purpose of the corporation
and the existing provisions of law. 24 Among the powers of the President is "to operate and conduct the business of the
corporation according to his own judgment and discretion, whenever the same is not expressly limited by such orders,
directives or resolutions." 25 Per standard practice of the corporation, contracts should first pass through the marketing and
intelligence unit before they are finalized. Because of its interest in the PWCC, the NIDC, through its comptroller, goes over
contracts involving funds of and white cement produced by the PWCC. Finally, among the duties of its legal counsel is to
review proposed contracts before they are submitted to the Board. While the president. may be tasked with the preparation
of a contract, it must first pass through the legal counsel and the comptroller of the corporation. 26
On 20 November 1975, after trial on the merits, the court handed down its decision in favor of herein petitioner, the
dispositive portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered:
(1) Ordering defendant: to complete the delivery of 45,000 bags of prime white cement at 94 lbs. net per bag at the
price agreed, with a breakage allowance of empty bags at 4% over the quantity agreed;
(2) Ordering defendant to pay P50,000.00, as moral damages; P5,000.00 as exemplary damages; P3,000.00 as
attorney's fees; and the costs of these proceedings.
SO ORDERED. 27
In disregarding PWCC's theory, the trial court interpreted the provision of the By-Laws — granting its Board of Directors the
power to enter into an agreement or contract of any kind with any person through the President, — to mean that the latter
may enter into such contract or agreement at any time and that the same is not subject to the ratification of the board of
directors but "subject only to the declared objects and purpose of the corporation and existing laws." It then concluded:
It is obvious therefore, that it is not the whole membership of the board of directors who actually enters into any contract
with any person in the name and for and in behalf of the corporation, but only its president. It is likewise crystal clear that
this automatic representation of the board by the president is limited only by the "declared objects and purpose of the
corporation and existing provisions of law." 28
It likewise interpreted the provision on the power of the president to "operate and conduct the business of the corporation
according to the orders, directives or resolutions of the board of directors and according to his own judgment and discretion
whenever the same is not expressly limited by such orders, directives and resolutions," to mean that the president can
operate and conduct the business of the corporation according to his own judgment and discretion as long as it is not
expressly limited by the orders, directives or resolutions of the board of directors. 29 The trial court found no evidence that
the board had set a prior limitation upon the exercise of such judgment and discretion; it further ruled that the By-Laws, does
not require that Exhibit "A" be approved by the Board of Directors. Finally, in the light of the Chairman's power to "execute
and sign for and in behalf of the corporation all contracts or agreements which the corporation may enter into" (Exhibit "I-
1"), it concluded that Mr. Maglana merely followed the By-Laws "presumably both as president and chairman of the board
thereof." 30 Hence, Exhibit "A" was validly entered into by Maglana and thus binds the corporation.
The trial court, however, ruled that the option to sell is not valid because it is not supported by any consideration distinct
from the price; it was exercised before compliance with the original contract by PWCC; and the repudiation of the original
contract by PWCC was deemed a withdrawal of the option before acceptance by the petitioner.
Both parties appealed from the said decision to the respondent Court of Appeals before which petitioner presented the
following Assignment of Errors:
I
THE TRIAL COURT ERRED IN HOLDING THAT THE OPTION TO RENEW THE CONTRACT OF SALE IS NOT ENFORCEABLE BECAUSE
THE OPTION WAS MADE EVEN BEFORE THE COMPLIANCE OF (sic) THE ORIGINAL CONTRACT BY DEFENDANT AND THAT
DEFENDANT'S PROMISE TO SELL IS NOT SUPPORTED BY ANY CONSIDERATION DISTINCT FROM THE PRICE.
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II
THE TRIAL COURT ERRED IN NOT AWARDING TO THE PLAINTIFF ACTUAL DAMAGES, SUFFICIENT EXEMPLARY DAMAGES AND
ATTORNEY'S FEES AS ALLEGED IN THE COMPLAINT AND PROVEN DURING THE TRIAL." 31
while the private respondent cited the following errors:
I whether defendant corporations president can bind the corporation with his own act.
THE TRIAL COURT ERRED IN HOLDING THAT EXHIBIT "A" IS A VALID CONTRACT OR PLAINTIFF CAN CLAIM THAT THE
PROPOSED LETTER-CONTRACT, EXHIBIT "A" IS LEGALLY ENFORCEABLE, AS THE SAME IS A MERE UNACCEPTED PROPOSAL,
NOT HAVING BEEN PREVIOUSLY AUTHORIZED TO BE ENTERED INTO OR LATER ON RATIFIED BY THE DEFENDANTS BOARD OF
DIRECTORS; IN FACT EXHIBIT "A" WAS TOTALLY REJECTED AND DISAPPROVED IN TOTO BY THE DEFENDANT'S BOARD OF
DIRECTORS IN CLEAR, PLAIN LANGUAGE AND DULY INFORMED AND TRANSMITTED TO PLAINTIFF.
II
THE TRIAL COURT ERRED IN HOLDING THAT PLAINTIFF CAN LEGALLY UTILIZE THE COURTS AS THE FORUM TO GIVE LIFE AND
VALIDITY TO A TOTALLY UNENFORCEABLE OR NON-EXISTING CONTRACT.
III
THE TRIAL COURT ERRED IN ALLOWING YAO KA SIN TO IMPUGN AND CONTRADICT HIS VERY OWN ACTUATIONS AND
REPUDIATE HIS ACCEPTANCE AND RECEIPTS OF BENEFITS FROM THE COUNTER-OFFER OF DEFENDANT FOR 10,000 BAGS OF
CEMENT ONLY, UNDER THE PRICE, TERMS AND CONDITIONS TOTALLY FOREIGN TO AND WHOLLY DIFFERENT FROM THOSE
WHICH APPEAR IN EXHIBIT "A".
IV
THE TRIAL COURT ERRED IN DISMISSING DEFENDANT'S COUNTER-CLAIMS AS THE SAME ARE DULY SUPPORTED BY CLEAR
AND INDUBITABLE EVIDENCE. 32
In its decision 33 promulgated on 21 December 1979, the respondent Court reversed the decision of the trial court, thus:
WHEREFORE, the judgment appealed from is REVERSED and set aside, Plaintiff's complaint is dismissed with costs. Plaintiff is
ordered to pay defendant corporation P25,000.00 exemplary damages, and P10,000.00 attorney's fees.
SO ORDERED.
Such conclusion is based on its findings, to wit:
Before resolving the issue, it is helpful to bring out some preliminary facts. First, the defendant corporation is supervised and
principally financed by the National Investment and Development Corporation (NIDC), a subsidiary investment of the
Philippine National Bank (PNB), with cash financial exposure of some P10,000,000.00. PNB is a government financial
institution whose Board is chairmaned (sic) by the Minister of National Defense. This fact is very material to the issue of
Second, for failure to deny under oath the following actionable documents in support of defendant's counterclaim:
1. The resolution contained in defendant's letter to plaintiff dated July 5, 1973, on the 10,000 bags of white cement
delivered to plaintiff was not by reason of the letter contract, Exhibit "A", which was totally disapproved by defendant
corporation's board of directors, clearly stating that "If within ten (10) days from date hereof, we will not hear from you but
you will withdraw cement at P24.30 per bag from our plant, then we will deposit your check of P243,000.00 dated June 7,
1973 issued by the Producers Bank of the Philippines, per instruction of the Board." (Annex "I" to defendant's Answer).
2. Letter of defendant to plaintiff dated August 4, 1973 that defendant "only committed to you and which you
accordingly paid 10,000 bags of white cement of which 4,150 bags were already delivered to you as of August 1, 1973"
(Annex "2" of defendant's Answer).
3. Letter dated August 21, 1973 to plaintiff reiterating defendant's letter of August 4, 1973 (Annex "3" to defendant's
Answer).
4. Letter to stores dated August 21, 1973,
5. Receipt from plaintiff (sic) P243,000.00 in payment of 10,000 bags of white cement at P24.30 per bag (Annex "5",
to defendant's Answer).
plaintiff is deemed to have admitted, not only the due execution and genuiness (sic) of said documents, (Rule 8 Sec. 8, Rules
of Court) but also the allegations therein (Rule 9, Sec. 1, Rules of Court). All of the foregoing documents tend to prove that
the letter-offer, Exhibit "A", was rejected by defendant corporation's Board of Directors and plaintiff was duly notified thereof
and that the P243,000.00 check was considered by both parties as payment of the 10,000 bags of cement under a separate
transaction. As proof of which plaintiff did not complain nor protest until February 9, 1974, when he threatened legal action.
Third, Maglana's signing the letter-offer prepared for him in the Solidbank was made clearly upon the condition that it
was subject to the approval of the board of directors of defendant corporation. We find consistency herein because according
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to the Corporation Law, and the By-Laws of defendant corporation, all corporate commitments and business are conducted
by, and contracts entered into through, the express authority of the Board of Directors (Sec. 28. Corp. Law, Exh "I" or "8").
Fourth, What Henry Yao and Maglana agreed upon as embodied in Exhibit "A", insofar as defendant corporation is
concerned, was an unauthorized contract (Arts. 1317 and 1403 (1), Civil Code). And because Maglana was not authorized by
the Board of Directors of defendant corporation nor was his, actuation ratified by the Board, the agreement is unenforceable
(Art. 1403 (1), Civil Code; Raquiza et al. vs. Lilles et al., 13 CA Rep. 343; Gana vs. Archbishop of Manila, 43 O-G. 3224).
While it may be true that Maglana is President of defendant corporation nowhere in the Articles of Incorporation nor in the
By-Laws of said corporation was he empowered to enter into any contract all by himself and bind the corporation without
first securing the authority and consent of the Board of Directors. Whatever authority Maglana may have must be derived
from the Board of Directors of defendant corporation. A corporate officers power as an agent must be sought from the law,
the articles of incorporation and the By-Laws or from a resolution of the Board (Vicente vs. Geraldez, 52 SCRA 227, Board of
Liquidators vs. Kalaw, 20 SCRA 987).
It clearly results from the foregoing that the judgment appealed from is untenable. Having no cause of action against
defendant corporation, plaintiff is not entitled to any relief. We see no justification, therefore, for the court a quo's awards in
its favor. . . . 34
Its motion for reconsideration having been denied by the respondent Court in its resolution 35 dated 15 April 1980,
petitioner filed the instant petition based on the following grounds:
1. That the contract (Exh. "A") entered into by the President and Chairman of the Board of Directors Constancio B.
Maglana in behalf of the respondent corporation binds the said corporation.
2. That the contract (Exh. "A") was never novated nor superceded (sic) by a subsequent contract.
3. That the option to renew the contract as contained in Exhibit "A" is enforceable.
4. That Sec. 8, Rule 8 of the Rules of Court only applies when the adverse party appear (sic) to be a party to the
instrument but not to one who is not a party to the instrument and Sec. 1, Rule 9 of the said Rules with regards (sic) to
denying under oath refers only to allegations of
usury. 36
We gave due course 37 to the petition after private respondent filed its Comment 38 and required the parties to submit
simultaneously their Memoranda, which the parties subsequently complied with. 39
Before going any further, this Court must first resolve an issue which, although raised in the Answer of private respondent,
was neither pursued in its appeal before the respondent Court nor in its Comment and Memorandum in this case. It also
eluded the attention of the trial court and the respondent Court. The issue, which is of paramount importance, concerns the
lack of capacity of plaintiff/petitioner to sue. In the caption of both the complaint and the instant petition, the plaintiff and
the petitioner, respectively, is:
YAO KA SIN TRADING,
owned and operated by
YAO KA SIN. 40
and is described in the body thereof as "a business concern of single proprietorship owned and operated by Yao Ka Sin." 41 In
the body of the petition, it is described as "a single proprietorship business concern." 42 It also appears that, as gathered
from the decision of the trial court, no Yao Ka Sin testified. Instead, one Henry Yao took the witness stand and testified that
he is the "manager of Yao Ka Sin Trading" and "it was in representation of the plaintiff" that he signed Exhibit "A" 43 Under
Section 1, Rule 3 of the Rules of Court, only natural or juridical persons or entities authorized by law may be parties in a civil
action. In Juasing Hardware vs. Mendoza, 44 this Court held that a single proprietorship is neither a natural person nor a
juridical person under Article 44 of the Civil Code; it is not an entity authorized by law to bring suit in court:
The law merely recognizes the existence of a sole proprietorship as a form of business organization conducted for profit by a
single individual, and requires the proprietor or owner thereof to secure licenses and permits, register the business name,
and pair taxes to the national government. It does not vest juridical or legal personality upon the sole proprietorship nor
empower it to file or defend an action in court. 45
Accordingly, the proper party plaintiff/petitioner should be YAO KA SIN. 46
The complaint then should have been amended to implead Yao Ka Sin as plaintiff in substitution of Yao Ka Sin Trading.
However, it is now too late in the history of this case to dismiss this petition and, in effect, nullify all proceedings had before
the trial court and the respondent Court on the sole ground of petitioner's lack of capacity to sue. Considering that private
respondent did not pursue this issue before the respondent Court and this Court; that, as We held in Juasing, the defect is
merely formal and not substantial, and an amendment to cure such defect is expressly authorized by Section 4, Rule 10 of the
Rules of Court which provides that "[a] defect in the designation of the parties may be summarily corrected at any stage of
the action provided no prejudice is caused thereby to the adverse party;" and that "[a] sole proprietorship does not, of
coarse, possess any juridical personality separate and apart from the personality of the owner of the enterprise and the
personality of the persons acting in the name of such proprietorship," 47 We hold and declare that Yao Ka Sin should be
deemed as the plaintiff in Civil Case No. 5064 and the petitioner in the instant case. As this Court stated nearly eighty (80)
years ago in Alonso vs. Villamor: 48
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No one has been misled by the error in the name of the party plaintiff. If we should by reason of this error send this case back
for amendment and new trial, there would be on the retrial the same complaint, the same answer, the same defense, the
same interests, the same witnesses, and the same evidence. The name of the plaintiff would constitute the only difference
between the old trial and the new. In our judgment there is not enough in a name to justify such action.
And now to the merits of the petition.
The respondent Court correctly ruled that Exhibit "A" is not binding upon the private respondent. Mr. Maglana, its President
and Chairman, was not empowered to execute it. Petitioner, on the other hand, maintains that it is a valid contract because
the Maglana has the power to enter into contracts for the corporation as implied from the following provisions of the By-
Laws of private respondent:
a) The power of the Board of Directors to . . . enter into (sic) agreement or contract of any kind with any person in
the name and for and in behalf of the corporation through its President, subject only to the declared objects and purpose of
the corporation and the existing provisions of law. (Exhibit "8-A"); and
b) The power of the Chairman of the Board of Directors to "execute and sign, for and in behalf of the corporation, all
contracts or agreements which the corporation may enter into" (Exhibit "I-1").
And even admitting, for the sake of argument, that Mr. Maglana was not so authorized under the By-Laws, the private
respondent, pursuant to the doctrine laid down by this Court in Francisco vs. Government Service Insurance
System 49 and Board of Liquidators vs. Kalaw, 50 is still bound by his act for clothing him with apparent authority.
We are not persuaded.
Since a corporation, such as the private respondent, can act only through its officers and agents, "all acts within the powers
of said corporation may be performed by agents of its selection; and, except so far as limitations or restrictions may be
imposed by special charter, by-law, or statutory provisions, the same general principles of law which govern the relation of
agency for a natural person govern the officer or agent of a corporation, of whatever status or rank, in respect to his power to
act for the corporation; and agents when once appointed, or members acting in their stead, are subject to the same rules,
liabilities and incapacities as are agents of individuals and private persons." 51 Moreover, " . . . a corporate officer or agent
may represent and bind the corporation in transactions with third persons to the extent that authority to do so has been
conferred upon him, and this includes powers which have been intentionally conferred, and also such powers as, in the usual
course of the particular business, are incidental to, or may be implied from, the powers intentionally conferred, powers
added by custom and usage, as usually pertaining to the particular officer or agent, and such apparent powers as the
corporation has caused persons dealing with the officer or agent to believe that it has conferred. 52
While there can be no question that Mr. Maglana was an officer — the President and Chairman — of private respondent
corporation at the time he signed Exhibit "A", the above provisions of said private respondent's By-Laws do not in any way
confer upon the President the authority to enter into contracts for the corporation independently, of the Board of Directors.
That power is exclusively lodged in the latter. Nevertheless, to expedite or facilitate the execution of the contract, only the
President — and not all the members of the Board, or so much thereof as are required for the act — shall sign it for the
corporation. This is the import of the words through the president in Exhibit "8-A" and the clear intent of the power of the
chairman "to execute and sign for and in behalf of the corporation all contracts and agreements which the corporation may
enter into" in Exhibit "I-1". Both powers presuppose a prior act of the corporation exercised through the Board of Directors.
No greater power can be implied from such express, but limited, delegated authority. Neither can it be logically claimed that
any power greater than that expressly conferred is inherent in Mr. Maglana's position as president and chairman of the
corporation.
Although there is authority "that if the president is given general control and supervision over the affairs of the corporation,
it will be presumed that he has authority to make contract and do acts within the course of its ordinary business," 53 We find
such inapplicable in this case. We note that the private corporation has a general manager who, under its By-Laws has, inter
alia, the following powers: "(a) to have the active and direct management of the business and operation of the corporation,
conducting the same accordingly to the order, directives or resolutions of the Board of Directors or of the president." It goes
without saying then that Mr. Maglana did not have a direct and active and in the management of the business and operations
of the corporation. Besides, no evidence was adduced to show that Mr. Maglana had, in the past, entered into contracts
similar to that of Exhibit "A" either with the petitioner or with other parties.
Petitioner's last refuge then is his alternative proposition, namely, that private respondent had clothed Mr. Maglana with the
apparent power to act for it and had caused persons dealing with it to believe that he was conferred with such power. The
rule is of course settled that "[a]lthough an officer or agent acts without, or in excess of, his actual authority if he acts within
the scope of an apparent authority with which the corporation has clothed him by holding him out or permitting him to
appear as having such authority, the corporation is bound thereby in favor of a person who deals with him in good faith in
reliance on such apparent authority, as where an officer is allowed to exercise a particular authority with respect to the
business, or a particular branch of it, continuously and publicly, for a considerable time." 54 Also, "if a private corporation
intentionally or negligently clothes its officers or agents with apparent power to perform acts for it, the corporation will be
estopped to deny that such apparent authority in real, as to innocent third persons dealing in good faith with such officers or
agents." 55 This "apparent authority may result from (1) the general manner, by which the corporation holds out an officer or
agent as having power to act or, in other words, the apparent authority with which it clothes him to act in general or (2)
acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or without the
scope of his ordinary powers. 56
It was incumbent upon the petitioner to prove that indeed the private respondent had clothed Mr. Maglana with the
apparent power to execute Exhibit "A" or any similar contract. This could have been easily done by evidence of similar acts
executed either in its favor or in favor of other parties. Petitioner miserably failed to do that. Upon the other hand, private
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respondent's evidence overwhelmingly shows that no contract can be signed by the president without first being approved
by the Board of Directors; such approval may only be given after the contract passes through, at least, the comptroller, who is
the NIDC representative, and the legal counsel.
The cases then of Francisco vs. GSIS and Board of Liquidators vs. Kalaw are hopelessly unavailing to the petitioner. In said
cases, this Court found sufficient evidence, based on the conduct and actuations of the corporations concerned, of apparent
authority conferred upon the officer involved which bound the corporations on the basis of ratification. In the first case, it
was established that the offer of compromise made by plaintiff in the letter, Exhibit "A", was validly accepted by the GSIS. The
terms of the trial offer were clear, and over the signature of defendant's general manager Rodolfo Andal, plaintiff was
informed telegraphically that her proposal had been accepted. It was sent by the GSIS Board Secretary and defendant did not
disown the same. Moreover, in a letter remitting the payment of P30,000 advanced by her father, plaintiff quoted verbatim
the telegram of acceptance. This was in itself notice to the corporation of the terms of the allegedly unauthorized telegram.
Notwithstanding this notice, GSIS pocketed the amount and kept silent about the telegram. This Court then ruled that:
This silence, taken together with the unconditional acceptance of three other subsequent remittances from plaintiff,
constitutes in itself a binding ratification of the original agreement (Civil Code, Art. 1393).
Art. 1393. Ratification may be effected expressly or tactly it is understood that there is a tacit ratification if, with knowledge
of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it
should execute an act which necessarily implies an intention to waive his right
In the second case, this Court found:
In the case at bar, the practice of the corporation has been to allow its general manager to negotiate and execute contracts in
its copra trading activities for and in NACOCO's behalf without prior board approval. If the by-laws were to be literally
followed, the board should give its stamp of prior approval on all corporate contracts. But that board itself, by its acts and
through acquiescence, practically laid aside the by-laws requirement of prior approval.
Under the given circumstances, the Kalaw contracts are valid corporate acts.
The inevitable conclusion then is that Exhibit "A" is an unenforceable contract under Article 1317 of the Civil Code which
provides as follows:
Art. 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by law a right
to represent him.
A contract entered into in the name of another by one who has no authority or legal representation, or who has acted
beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it, has
been execrated, before it is revoked by the other contracting party.
The second ground is based on a wrong premise. It assumes, contrary to Our conclusion above, that Exhibit "A" is a valid
contract binding upon the private respondent. It was effectively disapproved and rejected by the Board of Directors which, at
the same time, considered the amount of P243,000.00 received Mr. Maglana as payment for 10,000 bags of white cement,
treated as an entirely different contract, and forthwith notified petitioner of its decision that "If within ten (10) days from
date hereof we will not hear from you but you will withdraw cement at P24.30 per bag from our plant, then we will deposit
your check of P243,000.00 dated June 7, 1973 issued by the Producers Bank of the Philippines, per instruction of the Board."
57 Petitioner received the copy of this notification and thereafter accepted without any protest the Delivery Receipt covering
the 10,000 bags and the Official Receipt for the P243,000.00. The respondent Court thus correctly ruled that petitioner had in
fact agreed to a new transaction involving only 10,000 bags of white cement.
The third ground must likewise fail. Exhibit "A" being unenforceable, the option to renew it would have no leg to stand on.
The river cannot rise higher than its source. In any event, the option granted in. this case is without any consideration Article
1324 of the Civil Code expressly provides that:
When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before
acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something paid
or promised.
while Article 1749 of the same Code provides:
A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the
promise is supported by a consideration distinct from the price.
Accordingly, even if it were accepted, it can not validly bind the private respondent. 58
The fourth ground is, however, meritorious.
Section 8, Rule 8 of the Rules of Court provides:
Sec. 8. How to contest genuineness of such documents — When an action or defense is founded upon a written
instrument, copied in or attached in the corresponding pleading as provided in the preceding section, the genuineness and
due execution of the instrument shall be deemed admitted unless the adverse party, under oath, specifically denies them,
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and sets forth what he claims to be the facts; but this provision does not apply when the adverse party does not appear, to
be a party to the instrument or when compliance with an order for an inspection of the original instrument is refused.
It is clear that the petitioner is not a party to any of the documents attached to the private respondent's Answer. Thus, the
above quoted rule is not applicable. 59 While the respondent Court, erred in holding otherwise, the challenged decision
must, nevertheless, stand in view of the above disquisitions on the first to the third grounds of the petition.
WHEREFORE, judgment is hereby rendered AFFIRMING the decision of respondent Court of Appeals in C.A. G.R. No. 61072-R
promulgated on 21 December 1979.
Cost against the petitioner.
Gutierrez, Jr., Feliciano, Bidin and Romero, JJ., concur.
.R. No. 153468 August 17, 2006
PAUL LEE TAN, ANDREW LIUSON, ESTHER WONG, STEPHEN CO, JAMES TAN, JUDITH TAN, ERNESTO
TANCHI JR., EDWIN NGO, VIRGINIA KHOO, SABINO PADILLA JR., EDUARDO P. LIZARES and GRACE
CHRISTIAN HIGH SCHOOL, Petitioners,
vs.
PAUL SYCIP and MERRITTO LIM, Respondents.
DECISION
PANGANIBAN, CJ.:
For stock corporations, the "quorum" referred to in Section 52 of the Corporation Code is based on the number of
outstanding voting stocks. For nonstock corporations, only those who are actual, living members with voting
rights shall be counted in determining the existence of a quorum during members’ meetings. Dead members shall
not be counted.
The Case
The present Petition for Review on Certiorari [1] under Rule 45 of the Rules of Court seeks the reversal of the
January 23 2 and May 7, 2002, 3 Resolutions of the Court of Appeals (CA) in CA-GR SP No. 68202. The first
assailed Resolution dismissed the appeal filed by petitioners with the CA. Allegedly, without the proper
authorization of the other petitioners, the Verification and Certification of Non-Forum Shopping were signed by only
one of them -- Atty. Sabino Padilla Jr. The second Resolution denied reconsideration.
The Facts
Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit educational corporation with fifteen (15)
regular members, who also constitute the board of trustees. [4] During the annual members’ meeting held on April 6,
1998, there were only eleven (11) [5] living member-trustees, as four (4) had already died. Out of the eleven, seven
(7) 6 attended the meeting through their respective proxies. The meeting was convened and chaired by Atty.
Sabino Padilla Jr. over the objection of Atty. Antonio C. Pacis, who argued that there was no quorum. 7 In the
meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were voted to replace the four
deceased member-trustees.
When the controversy reached the Securities and Exchange Commission (SEC), petitioners maintained that the
deceased member-trustees should not be counted in the computation of the quorum because, upon their death,
members automatically lost all their rights (including the right to vote) and interests in the corporation.
SEC Hearing Officer Malthie G. Militar declared the April 6, 1998 meeting null and void for lack of quorum. She
held that the basis for determining the quorum in a meeting of members should be their number as specified in the
articles of incorporation, not simply the number of living members. 8 She explained that the qualifying phrase
"entitled to vote" in Section 24 9 of the Corporation Code, which provided the basis for determining a quorum for
the election of directors or trustees, should be read together with Section 89. 10
The hearing officer also opined that Article III (2) 11 of the By-Laws of GCHS, insofar as it prescribed the mode of
filling vacancies in the board of trustees, must be interpreted in conjunction with Section 29 12 of the Corporation
Code. The SEC en banc denied the appeal of petitioners and affirmed the Decision of the hearing officer in
toto. 13 It found to be untenable their contention that the word "members," as used in Section 52 14 of the
Corporation Code, referred only to the living members of a nonstock corporation. 15
As earlier stated, the CA dismissed the appeal of petitioners, because the Verification and Certification of Non-
Forum Shopping had been signed only by Atty. Sabino Padilla Jr. No Special Power of Attorney had been attached
to show his authority to sign for the rest of the petitioners.
Hence, this Petition. 16
Issues
Petitioners state the issues as follows:
"Petitioners principally pray for the resolution of the legal question of whether or not in NON-STOCK
corporations, dead members should still be counted in determination of quorum for purposed of conducting the
Annual Members’ Meeting.
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"Petitioners have maintained before the courts below that the DEAD members should no longer be counted in
computing quorum primarily on the ground that members’ rights are ‘personal and non-transferable’ as provided in
Sections 90 and 91 of the Corporation Code of the Philippines.
"The SEC ruled against the petitioners solely on the basis of a 1989 SEC Opinion that did not even involve a non-
stock corporation as petitioner GCHS.
"The Honorable Court of Appeals on the other hand simply refused to resolve this question and instead dismissed
the petition for review on a technicality – the failure to timely submit an SPA from the petitioners authorizing
their co-petitioner Padilla, their counsel and also a petitioner before the Court of Appeals, to sign the petition on
behalf of the rest of the petitioners.
"Petitioners humbly submit that the action of both the SEC and the Court of Appeals are not in accord with law
particularly the pronouncements of this Honorable Court in Escorpizo v. University of Baguio (306 SCRA
497), Robern Development Corporation v. Quitain (315 SCRA 150,) and MC Engineering, Inc. v. NLRC, (360
SCRA 183). Due course should have been given the petition below and the merits of the case decided in
petitioners’ favor." 17
In sum, the issues may be stated simply in this wise: 1) whether the CA erred in denying the Petition below, on the
basis of a defective Verification and Certification; and 2) whether dead members should still be counted in the
determination of the quorum, for purposes of conducting the annual members’ meeting.
The Court’s Ruling
The present Petition is partly meritorious.
Procedural Issue:
Verification and Certification of Non-Forum Shopping
The Petition before the CA was initially flawed, because the Verification and Certification of Non-Forum Shopping
were signed by only one, not by all, of the petitioners; further, it failed to show proof that the signatory was
authorized to sign on behalf of all of them. Subsequently, however, petitioners submitted a Special Power of
Attorney, attesting that Atty. Padilla was authorized to file the action on their behalf. 18
In the interest of substantial justice, this initial procedural lapse may be excused. 19 There appears to be no
intention to circumvent the need for proper verification and certification, which are aimed at assuring the
truthfulness and correctness of the allegations in the Petition for Review and at discouraging forum
shopping. 20 More important, the substantial merits of petitioners’ case and the purely legal question involved in the
Petition should be considered special circumstances 21 or compelling reasons that justify an exception to the strict
requirements of the verification and the certification of non-forum shopping. 22
Main Issue:
Basis for Quorum
Generally, stockholders’ or members’ meetings are called for the purpose of electing directors or trustees 23 and
transacting some other business calling for or requiring the action or consent of the shareholders or
members, 24such as the amendment of the articles of incorporation and bylaws, sale or disposition of all or
substantially all corporate assets, consolidation and merger and the like, or any other business that may properly
come before the meeting.
Under the Corporation Code, stockholders or members periodically elect the board of directors or trustees, who
are charged with the management of the corporation. 25 The board, in turn, periodically elects officers to carry out
management functions on a day-to-day basis. As owners, though, the stockholders or members have residual
powers over fundamental and major corporate changes.
While stockholders and members (in some instances) are entitled to receive profits, the management and direction
of the corporation are lodged with their representatives and agents -- the board of directors or trustees. 26 In other
words, acts of management pertain to the board; and those of ownership, to the stockholders or members. In the
latter case, the board cannot act alone, but must seek approval of the stockholders or members. 27
Conformably with the foregoing principles, one of the most important rights of a qualified shareholder or member is
the right
to vote -- either personally or by proxy -- for the directors or trustees who are to manage the corporate
affairs. 28The right to choose the persons who will direct, manage and operate the corporation is significant,
because it is the main way in which a stockholder can have a voice in the management of corporate affairs, or in
which a member in a nonstock corporation can have a say on how the purposes and goals of the corporation may
be achieved. 29 Once the directors or trustees are elected, the stockholders or members relinquish corporate
powers to the board in accordance with law.
In the absence of an express charter or statutory provision to the contrary, the general rule is that every member of
a nonstock corporation, and every legal owner of shares in a stock corporation, has a right to be present and to
vote in all corporate meetings. Conversely, those who are not stockholders or members have no right to
vote. 30 Voting may be expressed personally, or through proxies who vote in their representative
capacities. 31 Generally, the right to be present and to vote in a meeting is determined by the time in which the
meeting is held. 32
Section 52 of the Corporation Code states:
"Section 52. Quorum in Meetings. – Unless otherwise provided for in this Code or in the by-laws, a quorum shall
consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in
the case of non-stock corporations."
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In stock corporations, the presence of a quorum is ascertained and counted on the basis of the outstanding capital 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporation
stock, as defined by the Code thus: property;

"SECTION 137. Outstanding capital stock defined. – The term ‘outstanding capital stock’ as used in this Code, 4. Incurring, creating or increasing bonded indebtedness;
means the total shares of stock issued under binding subscription agreements to subscribers or stockholders,
whether or not fully or partially paid, except treasury shares." (Underscoring supplied)
5. Increase or decrease of capital stock;

The Right to Vote in

6. Merger or consolidation of the corporation with another corporation or other corporations;

Stock Corporations
7. Investment of corporate funds in another corporation or business in accordance with this Code; and

The right to vote is inherent in and incidental to the ownership of corporate stocks. 33 It is settled that unissued
8. Dissolution of the corporation.
stocks may not be voted or considered in determining whether a quorum is present in a stockholders’ meeting, or
whether a requisite proportion of the stock of the corporation is voted to adopt a certain measure or act. Only stock
actually issued and outstanding may be voted. 34 Under Section 6 of the Corporation Code, each share of stock is "Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate
entitled to vote, unless otherwise provided in the articles of incorporation or declared delinquent 35 under Section act as provided in this Code shall be deemed to refer only to stocks with voting rights."
67 of the Code.
Taken in conjunction with Section 137, the last paragraph of Section 6 shows that the intention of the lawmakers
Neither the stockholders nor the corporation can vote or represent shares that have never passed to the ownership was to base the quorum mentioned in Section 52 on the number of outstanding voting stocks. 38
of stockholders; or, having so passed, have again been purchased by the corporation. 36 These shares are not to
be taken into consideration in determining majorities. When the law speaks of a
The Right to Vote in
given proportion of the stock, it must be construed to mean the shares that have passed from the corporation, and
that may be voted. 37
Nonstock Corporations
Section 6 of the Corporation Code, in part, provides:
In nonstock corporations, the voting rights attach to membership. 39 Members vote as persons, in accordance with
the law and the bylaws of the corporation. Each member shall be entitled to one vote unless so limited, broadened,
"Section 6. Classification of shares. – The shares of stock of stock corporations may be divided into classes or
or denied in the articles of incorporation or bylaws. 40 We hold that when the principle for determining the quorum
series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions
for stock corporations is applied by analogy to nonstock corporations, only those who are actual members with
as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except
voting rights should be counted.
those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code:
Provided, further, that there shall always be a class or series of shares which have complete voting rights.
Under Section 52 of the Corporation Code, the majority of the members representing the actual number of voting
rights, not
xxxxxxxxx
the number or numerical constant that may originally be specified in the articles of incorporation, constitutes the
quorum. 41
"Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of
such shares shall nevertheless be entitled to vote on the following matters:
The March 3, 1986 SEC Opinion 42 cited by the hearing officer uses the phrase "majority vote of the members";
likewise Section 48 of the Corporation Code refers to 50 percent of 94 (the number of registered members of the
1. Amendment of the articles of incorporation; association mentioned therein) plus one. The best evidence of who are the present members of the corporation is
the "membership book"; in the case of stock corporations, it is the stock and transfer book. 43
2. Adoption and amendment of by-laws;

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Section 25 of the Code specifically provides that a majority of the directors or trustees, as fixed in the articles of
incorporation, shall constitute a quorum for the transaction of corporate business (unless the articles of
incorporation or the bylaws provide for a greater majority). If the intention of the lawmakers was to base the
quorum in the meetings of stockholders or members on their absolute number as fixed in the articles of
incorporation, it would have expressly specified so. Otherwise, the only logical conclusion is that the legislature did
not have that intention.
Effect of the Death
of a Member or Shareholder
Having thus determined that the quorum in a members’ meeting is to be reckoned as the actual number of
members of the corporation, the next question to resolve is what happens in the event of the death of one of them.
In stock corporations, shareholders may generally transfer their shares. Thus, on the death of a shareholder, the
executor or administrator duly appointed by the Court is vested with the legal title to the stock and entitled to vote
it. Until a settlement and division of the estate is effected, the stocks of the decedent are held by the administrator
or executor. 44
On the other hand, membership in and all rights arising from a nonstock corporation are personal and non-
transferable, unless the articles of incorporation or the bylaws of the corporation provide otherwise. 45 In other
words, the determination of whether or not "dead members" are entitled to exercise their voting rights (through
their executor or administrator), depends on those articles of incorporation or bylaws.
Under the By-Laws of GCHS, membership in the corporation shall, among others, be terminated by the death of
the member. 46 Section 91 of the Corporation Code further provides that termination extinguishes all the rights of a
member of the corporation, unless otherwise provided in the articles of incorporation or the bylaws.
Applying Section 91 to the present case, we hold that dead members who are dropped from the membership
roster in the manner and for the cause provided for in the By-Laws of GCHS are not to be counted in determining
the requisite vote in corporate matters or the requisite quorum for the annual members’ meeting. With 11 remaining
members, the quorum in the present case should be 6. Therefore, there being a quorum, the annual members’
meeting, conducted with six 47 members present, was valid.
Vacancy in the
Board of Trustees
As regards the filling of vacancies in the board of trustees, Section 29 of the Corporation Code provides:
"SECTION 29. Vacancies in the office of director or trustee. -- Any vacancy occurring in the board of directors or
trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the vote
of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies
must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so
elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in office."
Undoubtedly, trustees may fill vacancies in the board, provided that those remaining still constitute a quorum. The
phrase "may be filled" in Section 29 shows that the filling of vacancies in the board by the remaining directors or
trustees constituting a quorum is merely permissive, not mandatory. 48 Corporations, therefore, may choose how
vacancies in their respective boards may be filled up -- either by the remaining directors constituting a quorum, or
by the stockholders or members in a regular or special meeting called for the purpose. 49
The By-Laws of GCHS prescribed the specific mode of filling up existing vacancies in its board of directors; that is,
by a majority vote of the remaining members of the board. 50
While a majority of the remaining corporate members were present, however, the "election" of the four trustees
cannot be legally upheld for the obvious reason that it was held in an annual meeting of the members, not of the
board of trustees. We are not unmindful of the fact that the members of GCHS themselves also constitute the
trustees, but we cannot ignore the GCHS bylaw provision, which specifically prescribes that vacancies in the board
must be filled up by the remaining trustees. In other words, these remaining member-trustees must sit as a
board in order to validly elect the new ones.
Indeed, there is a well-defined distinction between a corporate act to be done by the board and that by the
constituent members of the corporation. The board of trustees must act, not individually or separately, but as a
body in a lawful meeting. On the other hand, in their annual meeting, the members may be represented by their
respective proxies, as in the contested annual members’ meeting of GCHS.
WHEREFORE, the Petition is partly GRANTED.The assailed Resolutions of the Court of Appeals are hereby
REVERSED AND SET ASIDE. The remaining members of the board of trustees of Grace Christian High School
(GCHS) may convene and fill up the vacancies in the board, in accordance with this Decision. No pronouncement
as to costs in this instance.
SO ORDERED.
ARTEMIO V. PANGANIBAN
Chief Justice
Chairperson, First Division
G.R. No. 151969 September 4, 2009
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VALLE VERDE COUNTRY CLUB, INC., ERNESTO VILLALUNA, RAY GAMBOA, AMADO M. SANTIAGO, JR., corporations controlled and held by the board of directors or trustees to be elected from among the holders of
FORTUNATO DEE, AUGUSTO SUNICO, VICTOR SALTA, FRANCISCO ORTIGAS III, ERIC ROXAS, in their stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1)
capacities as members of the Board of Directors of Valle Verde Country Club, Inc., and JOSE year until their successors are elected and qualified.
RAMIREZ,Petitioners,
vs.
xxxx
VICTOR AFRICA, Respondent.

Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the board of directors or
DECISION
trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the vote
of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies
BRION, J.: must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so
elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in office. xxx. [Emphasis
supplied.]
In this petition for review on certiorari,1 the parties raise a legal question on corporate governance: Can the
members of a corporation’s board of directors elect another director to fill in a vacancy caused by the resignation of
a hold-over director? Africa claimed that a year after Makalintal’s election as member of the VVCC Board in 1996, his [Makalintal’s] term
– as well as those of the other members of the VVCC Board – should be considered to have already expired.
Thus, according to Africa, the resulting vacancy should have been filled by the stockholders in a regular or special
THE FACTUAL ANTECEDENTS
meeting called for that purpose, and not by the remaining members of the VVCC Board, as was done in this case.

On February 27, 1996, during the Annual Stockholders’ Meeting of petitioner Valle Verde Country Club, Inc.
Africa additionally contends that for the members to exercise the authority to fill in vacancies in the board of
(VVCC), the following were elected as members of the VVCC Board of Directors: Ernesto Villaluna, Jaime C.
directors, Section 29 requires, among others, that there should be an unexpired term during which the successor-
Dinglasan (Dinglasan), Eduardo Makalintal (Makalintal), Francisco Ortigas III, Victor Salta, Amado M. Santiago, Jr.,
member shall serve. Since Makalintal’s term had already expired with the lapse of the one-year term provided in
Fortunato Dee, Augusto Sunico, and Ray Gamboa.2 In the years 1997, 1998, 1999, 2000, and 2001, however, the
Section 23, there is no more "unexpired term" during which Ramirez could serve.
requisite quorum for the holding of the stockholders’ meeting could not be obtained. Consequently, the above-
named directors continued to serve in the VVCC Board in a hold-over capacity.
Through a partial decision4 promulgated on January 23, 2002, the RTC ruled in favor of Africa and declared the
election of Ramirez, as Makalintal’s replacement, to the VVCC Board as null and void.
On September 1, 1998, Dinglasan resigned from his position as member of the VVCC Board. In a meeting held on
October 6, 1998, the remaining directors, still constituting a quorum of VVCC’s nine-member board, elected Eric
Roxas (Roxas) to fill in the vacancy created by the resignation of Dinglasan. Incidentally, the SEC issued a similar ruling on June 3, 2003, nullifying the election of Roxas as member of the
VVCC Board, vice hold-over director Dinglasan. While VVCC manifested its intent to appeal from the SEC’s ruling,
no petition was actually filed with the Court of Appeals; thus, the appellate court considered the case closed and
A year later, or on November 10, 1998, Makalintal also resigned as member of the VVCC Board. He was replaced
terminated and the SEC’s ruling final and executory.5
by Jose Ramirez (Ramirez), who was elected by the remaining members of the VVCC Board on March 6, 2001.

THE PETITION
Respondent Africa (Africa), a member of VVCC, questioned the election of Roxas and Ramirez as members of the
VVCC Board with the Securities and Exchange Commission (SEC) and the Regional Trial Court (RTC),
respectively. The SEC case questioning the validity of Roxas’ appointment was docketed as SEC Case No. 01-99- VVCC now appeals to the Court to assail the RTC’s January 23, 2002 partial decision for being contrary to law and
6177. The RTC case questioning the validity of Ramirez’ appointment was docketed as Civil Case No. 68726. jurisprudence. VVCC made a direct resort to the Court via a petition for review on certiorari, claiming that the sole
issue in the present case involves a purely legal question.
In his nullification complaint3 before the RTC, Africa alleged that the election of Roxas was contrary to Section 29,
in relation to Section 23, of the Corporation Code of the Philippines (Corporation Code). These provisions read: As framed by VVCC, the issue for resolution is whether the remaining directors of the corporation’s Board, still
constituting a quorum, can elect another director to fill in a vacancy caused by the resignation of a hold-over
director.
Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of
all corporations formed under this Code shall be exercised, all business conducted and all property of such

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Citing law and jurisprudence, VVCC posits that the power to fill in a vacancy created by the resignation of a hold-
over director is expressly granted to the remaining members of the corporation’s board of directors.
Under the above-quoted Section 29 of the Corporation Code, a vacancy occurring in the board of directors caused
by the expiration of a member’s term shall be filled by the corporation’s stockholders. Correlating Section 29 with
Section 23 of the same law, VVCC alleges that a member’s term shall be for one year and until his successor
is elected and qualified; otherwise stated, a member’s term expires only when his successor to the Board is
elected and qualified. Thus, "until such time as [a successor is] elected or qualified in an annual election where a
quorum is present," VVCC contends that "the term of [a member] of the board of directors has yet not expired."
As the vacancy in this case was caused by Makalintal’s resignation, not by the expiration of his term, VVCC insists
that the board rightfully appointed Ramirez to fill in the vacancy.
In support of its arguments, VVCC cites the Court’s ruling in the 1927 El Hogar6 case which states:
Owing to the failure of a quorum at most of the general meetings since the respondent has been in existence, it
has been the practice of the directors to fill in vacancies in the directorate by choosing suitable persons from
among the stockholders. This custom finds its sanction in Article 71 of the By-Laws, which reads as follows:
Art. 71. The directors shall elect from among the shareholders members to fill the vacancies that may occur in the
board of directors until the election at the general meeting.
xxxx
Upon failure of a quorum at any annual meeting the directorate naturally holds over and continues to function until
another directorate is chosen and qualified. Unless the law or the charter of a corporation expressly provides that
an office shall become vacant at the expiration of the term of office for which the officer was elected, the general
rule is to allow the officer to hold over until his successor is duly qualified. Mere failure of a corporation to elect
officers does not terminate the terms of existing officers nor dissolve the corporation. The doctrine above stated
finds expression in article 66 of the by-laws of the respondent which declares in so many words that directors shall
hold office "for the term of one year or until their successors shall have been elected and taken possession of their
offices." xxx.
It results that the practice of the directorate of filling vacancies by the action of the directors themselves is
valid. Nor can any exception be taken to the personality of the individuals chosen by the directors to fill vacancies
in the body. [Emphasis supplied.]
Africa, in opposing VVCC’s contentions, raises the same arguments that he did before the trial court.
THE COURT’S RULING
We are not persuaded by VVCC’s arguments and, thus, find its petition unmeritorious.
To repeat, the issue for the Court to resolve is whether the remaining directors of a corporation’s Board, still
constituting a quorum, can elect another director to fill in a vacancy caused by the resignation of a hold-over
director. The resolution of this legal issue is significantly hinged on the determination of what constitutes a
director’s term of office.
The holdover period is not part of the term of office of a member of the board of directors
The word "term" has acquired a definite meaning in jurisprudence. In several cases, we have defined "term" as the
time during which the officer may claim to hold the office as of right, and fixes the interval after which the several
incumbents shall succeed one another.7 The term of office is not affected by the holdover.8 The term is fixed by
statute and it does not change simply because the office may have become vacant, nor because the incumbent
holds over in office beyond the end of the term due to the fact that a successor has not been elected and has failed
to qualify.
Term is distinguished from tenure in that an officer’s "tenure" represents the term during which the incumbent
actually holds office. The tenure may be shorter (or, in case of holdover, longer) than the term for reasons within or
beyond the power of the incumbent.
Based on the above discussion, when Section 239 of the Corporation Code declares that "the board of directors…
shall hold office for one (1) year until their successors are elected and qualified," we construe the provision to
mean that the term of the members of the board of directors shall be only for one year; their term expires one year
after election to the office. The holdover period – that time from the lapse of one year from a member’s election to
the Board and until his successor’s election and qualification – is not part of the director’s original term of office,
nor is it a new term; the holdover period, however, constitutes part of his tenure. Corollary, when an incumbent
member of the board of directors continues to serve in a holdover capacity, it implies that the office has a fixed
term, which has expired, and the incumbent is holding the succeeding term. 10
After the lapse of one year from his election as member of the VVCC Board in 1996, Makalintal’s term of office is
deemed to have already expired. That he continued to serve in the VVCC Board in a holdover capacity cannot be
considered as extending his term. To be precise, Makalintal’s term of office began in 1996 and expired in 1997,
but, by virtue of the holdover doctrine in Section 23 of the Corporation Code, he continued to hold office until his
resignation on November 10, 1998. This holdover period, however, is not to be considered as part of his term,
which, as declared, had already expired.
With the expiration of Makalintal’s term of office, a vacancy resulted which, by the terms of Section 29 11 of the
Corporation Code, must be filled by the stockholders of VVCC in a regular or special meeting called for the
purpose. To assume – as VVCC does – that the vacancy is caused by Makalintal’s resignation in 1998, not by the
expiration of his term in 1997, is both illogical and unreasonable. His resignation as a holdover director did not
change the nature of the vacancy; the vacancy due to the expiration of Makalintal’s term had been created long
before his resignation.
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The powers of the corporation’s board of directors emanate from its stockholders
VVCC’s construction of Section 29 of the Corporation Code on the authority to fill up vacancies in the board of
directors, in relation to Section 23 thereof, effectively weakens the stockholders’ power to participate in the
corporate governance by electing their representatives to the board of directors. The board of directors is the
directing and controlling body of the corporation. It is a creation of the stockholders and derives its power to control
and direct the affairs of the corporation from them. The board of directors, in drawing to themselves the powers of
the corporation, occupies a position of trusteeship in relation to the stockholders, in the sense that the board
should exercise not only care and diligence, but utmost good faith in the management of corporate affairs. 12
The underlying policy of the Corporation Code is that the business and affairs of a corporation must be governed
by a board of directors whose members have stood for election, and who have actually been elected by the
stockholders, on an annual basis. Only in that way can the directors' continued accountability to shareholders, and
the legitimacy of their decisions that bind the corporation's stockholders, be assured. The shareholder vote is
critical to the theory that legitimizes the exercise of power by the directors or officers over properties that they do
not own.13
This theory of delegated power of the board of directors similarly explains why, under Section 29 of the Corporation
Code, in cases where the vacancy in the corporation’s board of directors is caused not by the expiration of a
member’s term, the successor "so elected to fill in a vacancy shall be elected only for the unexpired term of the his
predecessor in office." The law has authorized the remaining members of the board to fill in a vacancy only in
specified instances, so as not to retard or impair the corporation’s operations; yet, in recognition of the
stockholders’ right to elect the members of the board, it limited the period during which the successor shall serve
only to the "unexpired term of his predecessor in office."
While the Court in El Hogar approved of the practice of the directors to fill vacancies in the directorate, we point out
that this ruling was made before the present Corporation Code was enacted14 and before its Section 29 limited the
instances when the remaining directors can fill in vacancies in the board, i.e., when the remaining directors still
constitute a quorum and when the vacancy is caused for reasons other than by removal by the stockholders or by
expiration of the term.1avvphi1
It also bears noting that the vacancy referred to in Section 29 contemplates a vacancy occurring within the
director’s term of office. When a vacancy is created by the expiration of a term, logically, there is no more
unexpired term to speak of. Hence, Section 29 declares that it shall be the corporation’s stockholders who shall
possess the authority to fill in a vacancy caused by the expiration of a member’s term.
As correctly pointed out by the RTC, when remaining members of the VVCC Board elected Ramirez to replace
Makalintal, there was no more unexpired term to speak of, as Makalintal’s one-year term had already expired.
Pursuant to law, the authority to fill in the vacancy caused by Makalintal’s leaving lies with the VVCC’s
stockholders, not the remaining members of its board of directors.
WHEREFORE, we DENY the petitioners’ petition for review on certiorari, and AFFIRM the partial decision of the
Regional Trial Court, Branch 152, Manila, promulgated on January 23, 2002, in Civil Case No. 68726. Costs
against the petitioners.
SO ORDERED.
ARTURO D. BRION
Associate Justice
G.R. No. 161886 March 16, 2007
FILIPINAS PORT SERVICES, INC., represented by stockholders, ELIODORO C. CRUZ and MINDANAO
TERMINAL AND BROKERAGE SERVICES, INC., Petitioners,
vs.
VICTORIANO S. GO, ARSENIO LOPEZ CHUA, EDGAR C. TRINIDAD, HERMENEGILDO M. TRINIDAD, JESUS
SYBICO, MARY JEAN D. CO, HENRY CHUA, JOSELITO S. JAYME, ERNESTO S. JAYME, and ELIEZER B. DE
JESUS, Respondents.
DECISION
GARCIA, J.:
Assailed and sought to be set aside in this petition for review on certiorari is the Decision 1 dated 19 January 2004
of the Court of Appeals (CA) in CA-G.R. CV No. 73827, reversing an earlier decision of the Regional Trial Court
(RTC) of Davao City and accordingly dismissing the derivative suit instituted by petitioner Eliodoro C. Cruz for and
in behalf of the stockholders of co-petitioner Filipinas Port Services, Inc. (Filport, hereafter).
The case is actually an intra-corporate dispute involving Filport, a domestic corporation engaged in stevedoring
services with principal office in Davao City. It was initially instituted with the Securities and Exchange Commission
(SEC) where the case hibernated and remained unresolved for several years until it was overtaken by the
enactment into law, on 19 July 2000, of Republic Act (R.A.) No. 8799, otherwise known as the Securities
Regulation Code. From the SEC and consistent with R.A. No. 8799, the case was transferred to the RTC of
Manila, Branch 14, sitting as a corporate court. Subsequently, upon respondents’ motion, the case eventually
landed at the RTC of Davao City where it was docketed as Civil Case No. 28,552-2001. RTC-Davao City, Branch
10, ruled in favor of the petitioners prompting respondents to go to the CA in CA-G.R. CV No. 73827. This time, the
respondents prevailed, hence, this petition for review by the petitioners.
The relevant facts:
On 4 September 1992, petitioner Eliodoro C. Cruz, Filport’s president from 1968 until he lost his bid for reelection
as Filport’s president during the general stockholders’ meeting in 1991, wrote a letter 2 to the corporation’s Board of
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Directors questioning the board’s creation of the following positions with a monthly remuneration of ₱13,050.00
each, and the election thereto of certain members of the board, to wit:
Asst. Vice-President for Corporate Planning - Edgar C. Trinidad (Director)
Asst. Vice-President for Operations - Eliezer B. de Jesus (Director)
Asst. Vice-President for Finance - Mary Jean D. Co (Director)
Asst. Vice-President for Administration - Henry Chua (Director)
Special Asst. to the Chairman - Arsenio Lopez Chua (Director)
Special Asst. to the President - Fortunato V. de Castro
In his aforesaid letter, Cruz requested the board to take necessary action/actions to recover from those elected to
the aforementioned positions the salaries they have received.
On 15 September 1992, the board met and took up Cruz’s letter. The records do not show what specific
action/actions the board had taken on the letter. Evidently, whatever action/actions the board took did not sit well
with Cruz.
On 14 June 1993, Cruz, purportedly in representation of Filport and its stockholders, among which is herein co-
petitioner Mindanao Terminal and Brokerage Services, Inc. (Minterbro), filed with the SEC a petition 3 which he
describes as a derivative suit against the herein respondents who were then the incumbent members of Filport’s
Board of Directors, for alleged acts of mismanagement detrimental to the interest of the corporation and its
shareholders at large, namely:
1. creation of an executive committee in 1991 composed of seven (7) members of the board with
compensation of ₱500.00 for each member per meeting, an office which, to Cruz, is not provided for in
the by-laws of the corporation and whose function merely duplicates those of the President and General
Manager;
2. increase in the emoluments of the Chairman, Vice-President, Treasurer and Assistant General
Manager which increases are greatly disproportionate to the volume and character of the work of the
directors holding said positions;
3. re-creation of the positions of Assistant Vice-Presidents (AVPs) for Corporate Planning, Operations,
Finance and Administration, and the election thereto of board members Edgar C. Trinidad, Eliezer de
Jesus, Mary Jean D. Co and Henry Chua, respectively; and
4. creation of the additional positions of Special Assistants to the President and the Board Chairman,
with Fortunato V. de Castro and Arsenio Lopez Chua elected to the same, the directors
elected/appointed thereto not doing any work to deserve the monthly remuneration of ₱13,050.00 each.
In the same petition, docketed as SEC Case No. 06-93-4491, Cruz alleged that despite demands made upon the
respondent members of the board of directors to desist from creating the positions in question and to account for
the amounts incurred in creating the same, the demands were unheeded. Cruz thus prayed that the respondent
members of the board of directors be made to pay Filport, jointly and severally, the sums of money variedly
representing the damages incurred as a result of the creation of the offices/positions complained of and the
aggregate amount of the questioned increased salaries.
In their common Answer with Counterclaim,4 the respondents denied the allegations of mismanagement and
materially averred as follows:
1. the creation of the executive committee and the grant of per diems for the attendance of each member
are allowed under the by-laws of the corporation;
2. the increases in the salaries/emoluments of the Chairman, Vice-President, Treasurer and Assistant
General Manager were well within the financial capacity of the corporation and well-deserved by the
officers elected thereto; and
3. the positions of AVPs for Corporate Planning, Operations, Finance and Administration were already in
existence during the tenure of Cruz as president of the corporation, and were merely recreated by the
Board, adding that all those appointed to said positions of Assistant Vice Presidents, as well as the
additional position of Special Assistants to the Chairman and the President, rendered services to
deserve their compensation.
In the same Answer, respondents further averred that Cruz and his co-petitioner Minterbro, while admittedly
stockholders of Filport, have no authority nor standing to bring the so-called "derivative suit" for and in behalf of the
corporation; that respondent Mary Jean D. Co has already ceased to be a corporate director and so with Fortunato
V. de Castro, one of those holding an assailed position; and that no demand to cease and desist from further
committing the acts complained of was made upon the board. By way of affirmative defenses, respondents
asserted that (1) the petition is not duly verified by petitioner Filport which is the real party-in-interest; (2) Filport, as
represented by Cruz and Minterbro, failed to exhaust remedies for redress within the corporation before bringing
the suit; and (3) the petition does not show that the stockholders bringing the suit are joined as nominal parties. In
support of their counterclaim, respondents averred that Cruz filed the alleged derivative suit in bad faith and purely
for harassment purposes on account of his non-reelection to the board in the 1991 general stockholders’ meeting.
As earlier narrated, the derivative suit (SEC Case No. 06-93-4491) hibernated with the SEC for a long period of
time. With the enactment of R.A. No. 8799, the case was first turned over to the RTC of Manila, Branch 14, sitting
as a corporate court. Thereafter, on respondents’ motion, it was eventually transferred to the RTC of Davao City
whereat it was docketed as Civil Case No. 28,552-2001 and raffled to Branch 10 thereof.
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On 10 December 2001, RTC-Davao City rendered its decision5 in the case. Even as it found that (1) Filport’s Board Hence, petitioners’ present recourse.
of Directors has the power to create positions not provided for in the by-laws of the corporation since the board is
the governing body; and (2) the increases in the salaries of the board chairman, vice-president, treasurer and
Petitioners assigned four (4) errors allegedly committed by the CA. For clarity, we shall formulate the issues as
assistant general manager are reasonable, the trial court nonetheless rendered judgment against the respondents
follows:
by ordering the directors holding the positions of Assistant Vice President for Corporate Planning, Special Assistant
to the President and Special Assistant to the Board Chairman to refund to the corporation the salaries they have
received as such officers "considering that Filipinas Port Services is not a big corporation requiring multiple 1. Whether the CA erred in holding that Filport’s Board of Directors acted within its powers in creating the
executive positions" and that said positions "were just created for accommodation." We quote the fallo of the trial executive committee and the positions of AVPs for Corporate Planning, Operations, Finance and
court’s decision. Administration, and those of the Special Assistants to the President and the Board Chairman, each with
corresponding remuneration, and in increasing the salaries of the positions of Board Chairman, Vice-
President, Treasurer and Assistant General Manager; and
WHEREFORE, judgment is rendered ordering:

2. Whether the CA erred in finding that no evidence exists to prove that (a) the positions of AVP for
Edgar C. Trinidad under the third and fourth causes of action to restore to the corporation the total amount of
Corporate Planning, Special Assistant to the President and Special Assistant to the Board Chairman
salaries he received as assistant vice president for corporate planning; and likewise ordering Fortunato V. de
were created merely for accommodation, and (b) the salaries/emoluments corresponding to said
Castro and Arsenio Lopez Chua under the fourth cause of action to restore to the corporation the salaries they
positions were actually paid to and received by the directors appointed thereto.
each received as special assistants respectively to the president and board chairman. In case of insolvency of any
or all of them, the members of the board who created their positions are subsidiarily liable.
For their part, respondents, aside from questioning the propriety of the instant petition as the same allegedly raises
only questions of fact and not of law, also put in issue the purported derivative nature of the main suit initiated by
The counter claim is dismissed.
petitioner Eliodoro C. Cruz allegedly in representation of and in behalf of Filport and its stockholders.

From the adverse decision of the trial court, herein respondents went on appeal to the CA in CA-G.R. CV No.
The petition is bereft of merit.
73827.

It is axiomatic that in petitions for review on certiorari under Rule 45 of the Rules of Court, only questions of law
In its decision6 of 19 January 2004, the CA, taking exceptions to the findings of the trial court that the creation of
may be raised and passed upon by the Court. Factual findings of the CA are binding and conclusive and will not be
the positions of Assistant Vice President for Corporate Planning, Special Assistant to the President and Special
reviewed or disturbed on appeal.10 Of course, the rule is not cast in stone; it admits of certain exceptions, such as
Assistant to the Board Chairman was merely for accommodation purposes, granted the respondents’ appeal,
when the findings of fact of the appellate court are at variance with those of the trial court,11 as here. For this
reversed and set aside the appealed decision of the trial court and accordingly dismissed the so-called derivative
reason, and for a proper and complete resolution of the case, we shall delve into the records and reexamine the
suit filed by Cruz, et al., thus:
same.

IN VIEW OF ALL THE FOREGOING, the instant appeal is GRANTED, the challenged decision
is REVERSED and SET ASIDE, and a new one entered DISMISSING Civil Case No. 28,552-2001 with no
pronouncement as to costs.
SO ORDERED.
Intrigued, and quite understandably, by the fact that, in its decision, the CA, before proceeding to address the
merits of the appeal, prefaced its disposition with the statement reading "[T]he appeal is bereft of merit," 7 thereby
contradicting the very fallo of its own decision and the discussions made in the body thereof, respondents filed with
the appellate court a Motion For Nunc Pro Tunc Order,8 thereunder praying that the phrase "[T]he appeal is bereft
of merit," be corrected to read "[T]he appeal is impressed with merit." In its resolution 9 of 23 April 2004, the CA
granted the respondents’ motion and accordingly effected the desired correction.
The governing body of a corporation is its board of directors. Section 23 of the Corporation Code 12 explicitly
provides that unless otherwise provided therein, the corporate powers of all corporations formed under the Code
shall be exercised, all business conducted and all property of the corporation shall be controlled and held by a
board of directors. Thus, with the exception only of some powers expressly granted by law to stockholders (or
members, in case of non-stock corporations), the board of directors (or trustees, in case of non-stock corporations)
has the sole authority to determine policies, enter into contracts, and conduct the ordinary business of the
corporation within the scope of its charter, i.e., its articles of incorporation, by-laws and relevant provisions of law.
Verily, the authority of the board of directors is restricted to the management of the regular business affairs of the
corporation, unless more extensive power is expressly conferred.
The raison d’etre behind the conferment of corporate powers on the board of directors is not lost on the Court.
Indeed, the concentration in the board of the powers of control of corporate business and of appointment of
corporate officers and managers is necessary for efficiency in any large organization. Stockholders are too

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numerous, scattered and unfamiliar with the business of a corporation to conduct its business directly. And so the
plan of corporate organization is for the stockholders to choose the directors who shall control and supervise the
conduct of corporate business.13
In the present case, the board’s creation of the positions of Assistant Vice Presidents for Corporate Planning,
Operations, Finance and Administration, and those of the Special Assistants to the President and the Board
Chairman, was in accordance with the regular business operations of Filport as it is authorized to do so by the
corporation’s by-laws, pursuant to the Corporation Code.
The election of officers of a corporation is provided for under Section 25 of the Code which reads:
Sec. 25. Corporate officers, quorum. – Immediately after their election, the directors of a corporation must formally
organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a
secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in
the by-laws. (Emphasis supplied.)
In turn, the amended Bylaws of Filport14 provides the following:
Officers of the corporation, as provided for by the by-laws, shall be elected by the board of directors at their first
meeting after the election of Directors. xxx
The officers of the corporation shall be a Chairman of the Board, President, a Vice-President, a Secretary, a
Treasurer, a General Manager and such other officers as the Board of Directors may from time to time provide, and
these officers shall be elected to hold office until their successors are elected and qualified. (Emphasis supplied.)
Likewise, the fixing of the corresponding remuneration for the positions in question is provided for in the same by-
laws of the corporation, viz:
xxx The Board of Directors shall fix the compensation of the officers and agents of the corporation. (Emphasis
supplied.)
Unfortunately, the bylaws of the corporation are silent as to the creation by its board of directors of an executive
committee. Under Section 3515 of the Corporation Code, the creation of an executive committee must be provided
for in the bylaws of the corporation.
Notwithstanding the silence of Filport’s bylaws on the matter, we cannot rule that the creation of the executive
committee by the board of directors is illegal or unlawful. One reason is the absence of a showing as to the true
nature and functions of said executive committee considering that the "executive committee," referred to in Section
35 of the Corporation Code which is as powerful as the board of directors and in effect acting for the board itself,
should be distinguished from other committees which are within the competency of the board to create at anytime
and whose actions require ratification and confirmation by the board.16 Another reason is that, ratiocinated by both
the two (2) courts below, the Board of Directors has the power to create positions not provided for in Filport’s
bylaws since the board is the corporation’s governing body, clearly upholding the power of its board to exercise its
prerogatives in managing the business affairs of the corporation.
As well, it may not be amiss to point out that, as testified to and admitted by petitioner Cruz himself, it was during
his incumbency as Filport president that the executive committee in question was created, and that he was even
the one who moved for the creation of the positions of the AVPs for Operations, Finance and Administration. By his
acquiescence and/or ratification of the creation of the aforesaid offices, Cruz is virtually precluded from suing to
declare such acts of the board as invalid or illegal. And it makes no difference that he sues in behalf of himself and
of the other stockholders. Indeed, as his voice was not heard in protest when he was still Filport’s president, raising
a hue and cry only now leads to the inevitable conclusion that he did so out of spite and resentment for his non-
reelection as president of the corporation.
With regard to the increased emoluments of the Board Chairman, Vice-President, Treasurer and Assistant General
Manager which are supposedly disproportionate to the volume and nature of their work, the Court, after a judicious
scrutiny of the increase vis-à-vis the value of the services rendered to the corporation by the officers concerned,
agrees with the findings of both the trial and appellate courts as to the reasonableness and fairness thereof.
Continuing, petitioners contend that the CA did not appreciate their evidence as to the alleged acts of
mismanagement by the then incumbent board. A perusal of the records, however, reveals that petitioners merely
relied on the testimony of Cruz in support of their bold claim of mismanagement. To the mind of the Court, Cruz’
testimony on the matter of mismanagement is bereft of any foundation. As it were, his testimony consists merely of
insinuations of alleged wrongdoings on the part of the board. Without more, petitioners’ posture of mismanagement
must fall and with it goes their prayer to hold the respondents liable therefor.
But even assuming, in gratia argumenti, that there was mismanagement resulting to corporate damages and/or
business losses, still the respondents may not be held liable in the absence, as here, of a showing of bad faith in
doing the acts complained of.
If the cause of the losses is merely error in business judgment, not amounting to bad faith or negligence, directors
and/or officers are not liable.17 For them to be held accountable, the mismanagement and the resulting losses on
account thereof are not the only matters to be proven; it is likewise necessary to show that the directors and/or
officers acted in bad faith and with malice in doing the assailed acts. Bad faith does not simply connote bad
judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, a
breach of a known duty through some motive or interest or ill-will partaking of the nature of fraud. 18 We have
searched the records and nowhere do we find a "dishonest purpose" or "some moral obliquity," or "conscious doing
of a wrong" on the part of the respondents that "partakes of the nature of fraud."
We thus extend concurrence to the following findings of the CA, affirmatory of those of the trial court:
xxx As a matter of fact, it was during the term of appellee Cruz, as president and director, that the executive
committee was created. What is more, it was appellee himself who moved for the creation of the positions of
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assistant vice presidents for operations, for finance, and for administration. He should not be heard to complain
thereafter for similar corporate acts.
The increase in the salaries of the board chairman, president, treasurer, and assistant general manager are indeed
reasonable enough in view of the responsibilities assigned to them, and the special knowledge required, to be able
to effectively discharge their respective functions and duties.
Surely, factual findings of trial courts, especially when affirmed by the CA, are binding and conclusive on this Court.
There is, however, a factual matter over which the CA and the trial court parted ways. We refer to the
accommodation angle.
The trial court was with petitioner Cruz in saying that the creation of the positions of the three (3) AVPs for
Corporate Planning, Special Assistant to the President and Special Assistant to the Board Chairman, each with a
salary of ₱13,050.00 a month, was merely for accommodation purposes considering that Filport is not a big
corporation requiring multiple executive positions. Hence, the trial court’s order for said officers to return the
amounts they received as compensation.
On the other hand, the CA took issue with the trial court and ruled that Cruz’s accommodation theory is not based
on facts and without any evidentiary substantiation.
We concur with the line of the appellate court. For truly, aside from Cruz’s bare and self-serving testimony, no other
evidence was presented to show the fact of "accommodation." By itself, the testimony of Cruz is not enough to
support his claim that accommodation was the underlying factor behind the creation of the aforementioned three
(3) positions.
It is elementary in procedural law that bare allegations do not constitute evidence adequate to support a
conclusion. It is basic in the rule of evidence that he who alleges a fact bears the burden of proving it by the
quantum of proof required. Bare allegations, unsubstantiated by evidence, are not equivalent to proof under the
Rules of Court.19 The party having the burden of proof must establish his case by a preponderance of evidence.20
Besides, the determination of the necessity for additional offices and/or positions in a corporation is a management
prerogative which courts are not wont to review in the absence of any proof that such prerogative was exercised in
bad faith or with malice.1awphi1.nét
Indeed, it would be an improper judicial intrusion into the internal affairs of Filport were the Court to determine the
propriety or impropriety of the creation of offices therein and the grant of salary increases to officers thereof. Such
are corporate and/or business decisions which only the corporation’s Board of Directors can determine.
So it is that in Philippine Stock Exchange, Inc. v. CA,21 the Court unequivocally held:
Questions of policy or of management are left solely to the honest decision of the board as the business manager
of the corporation, and the court is without authority to substitute its judgment for that of the board, and as long as
it acts in good faith and in the exercise of honest judgment in the interest of the corporation, its orders are not
reviewable by the courts.
In a last-ditch attempt to salvage their cause, petitioners assert that the CA went beyond the issues raised in the
court of origin when it ruled on the absence of receipt of actual payment of the salaries/emoluments pertaining to
the positions of Assistant Vice-President for Corporate Planning, Special Assistant to the Board Chairman and
Special Assistant to the President. Petitioners insist that the issue of nonpayment was never raised by the
respondents before the trial court, as in fact, the latter allegedly admitted the same in their Answer With
Counterclaim.
We are not persuaded.
By claiming that Filport suffered damages because the directors appointed to the assailed positions are not doing
anything to deserve their compensation, petitioners are saddled with the burden of proving that salaries were
actually paid. Since the trial court, in effect, found that the petitioners successfully proved payment of the salaries
when it directed the reimbursements of the same, respondents necessarily have to raise the issue on appeal. And
the CA rightly resolved the issue when it found that no evidence of actual payment of the salaries in question was
actually adduced. Respondents’ alleged admission of the fact of payment cannot be inferred from a reading of the
pertinent portions of the parties’ respective initiatory pleadings. Respondents’ allegations in their Answer With
Counterclaim that the officers corresponding to the positions created "performed the work called for in their
positions" or "deserve their compensation," cannot be interpreted to mean that they were "actually paid" such
compensation. Directly put, the averment that "one deserves one’s compensation" does not necessarily carry the
implication that "such compensation was actually remitted or received." And because payment was not duly
proven, there is no evidentiary or factual basis for the trial court to direct respondents to make reimbursements
thereof to the corporation.
This brings us to the respondents’ claim that the case filed by the petitioners before the SEC, which eventually
landed in RTC-Davao City as Civil Case No. 28,552-2001, is not a derivative suit, as maintained by the petitioners.
We sustain the petitioners.
Under the Corporation Code, where a corporation is an injured party, its power to sue is lodged with its board of
directors or trustees. But an individual stockholder may be permitted to institute a derivative suit in behalf of the
corporation in order to protect or vindicate corporate rights whenever the officials of the corporation refuse to sue,
or when a demand upon them to file the necessary action would be futile because they are the ones to be sued, or
because they hold control of the corporation.22 In such actions, the corporation is the real party-in-interest while the
suing stockholder, in behalf of the corporation, is only a nominal party.23
Here, the action below is principally for damages resulting from alleged mismanagement of the affairs of Filport by
its directors/officers, it being alleged that the acts of mismanagement are detrimental to the interests of Filport.
Thus, the injury complained of primarily pertains to the corporation so that the suit for relief should be by the
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corporation. However, since the ones to be sued are the directors/officers of the corporation itself, a stockholder,
like petitioner Cruz, may validly institute a "derivative suit" to vindicate the alleged corporate injury, in which case
Cruz is only a nominal party while Filport is the real party-in-interest. For sure, in the prayer portion of petitioners’
petition before the SEC, the reliefs prayed were asked to be made in favor of Filport.
Besides, the requisites before a derivative suit can be filed by a stockholder are present in this case, to wit:
a) the party bringing suit should be a shareholder as of the time of the act or transaction complained of,
the number of his shares not being material;
b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors
for the appropriate relief but the latter has failed or refused to heed his plea; and
c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or
being caused to the corporation and not to the particular stockholder bringing the suit.24
Indisputably, petitioner Cruz (1) is a stockholder of Filport; (2) he sought without success to have its board of
directors remedy what he perceived as wrong when he wrote a letter requesting the board to do the necessary
action in his complaint; and (3) the alleged wrong was in truth a wrong against the stockholders of the corporation
generally, and not against Cruz or Minterbro, in particular. In the end, it is Filport, not Cruz which directly stands to
benefit from the suit. And while it is true that the complaining stockholder must show to the satisfaction of the court
that he has exhausted all the means within his reach to attain within the corporation itself the redress for his
grievances, or actions in conformity to his wishes, nonetheless, where the corporation is under the complete
control of the principal defendants, as here, there is no necessity of making a demand upon the directors. The
reason is obvious: a demand upon the board to institute an action and prosecute the same effectively would have
been useless and an exercise in futility. In fine, we rule and so hold that the petition filed with the SEC at the
instance of Cruz, which ultimately found its way to the RTC of Davao City as Civil Case No. 28,552-2001, is a
derivative suit of which Cruz has the necessary legal standing to institute.
WHEREFORE, the petition is DENIED and the challenged decision of the CA is AFFIRMED in all respects.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 125469 October 27, 1997
PHILIPPINE STOCK EXCHANGE, INC., petitioner,
vs.
THE HONORABLE COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and PUERTO AZUL
LAND, INC., respondents.
TORRES, JR., J.:
The Securities and Exchange Commission is the government agency, under the direct general supervision of the
Office of the President, 1 with the immense task of enforcing the Revised Securities Act, and all other duties
assigned to it by pertinent laws. Among its inumerable functions, and one of the most important, is the supervision
of all corporations, partnerships or associations, who are grantees of primary franchise and/or a license or permit
issued by the government to operate in the Philippines. 2 Just how far this regulatory authority extends, particularly,
with regard to the Petitioner Philippine Stock Exchange, Inc. is the issue in the case at bar.
In this Petition for Review on Certiorari, petitioner assails the resolution of the respondent Court of Appeals, dated
June 27, 1996, which affirmed the decision of the Securities and Exchange Commission ordering the petitioner
Philippine Stock Exchange, Inc. to allow the private respondent Puerto Azul Land, Inc. to be listed in its stock
market, thus paving the way for the public offering of PALI's shares.
The facts of the case are undisputed, and are hereby restated in sum.
The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had sought to offer its shares to the public in
order to raise funds allegedly to develop its properties and pay its loans with several banking institutions. In
January, 1995, PALI was issued a Permit to Sell its shares to the public by the Securities and Exchange
Commission (SEC). To facilitate the trading of its shares among investors, PALI sought to course the trading of its
shares through the Philippine Stock Exchange, Inc. (PSE), for which purpose it filed with the said stock exchange
an application to list its shares, with supporting documents attached.
On February 8, 1996, the Listing Committee of the PSE, upon a perusal of PALI's application, recommended to the
PSE's Board of Governors the approval of PALI's listing application.
On February 14, 1996, before it could act upon PALI's application, the Board of Governors of the PSE received a
letter from the heirs of Ferdinand E. Marcos, claiming that the late President Marcos was the legal and beneficial
owner of certain properties forming part of the Puerto Azul Beach Hotel and Resort Complex which PALI claims to
be among its assets and that the Ternate Development Corporation, which is among the stockholders of PALI,
likewise appears to have been held and continue to be held in trust by one Rebecco Panlilio for then President
Marcos and now, effectively for his estate, and requested PALI's application to be deferred. PALI was requested to
comment upon the said letter.
PALI's answer stated that the properties forming part of the Puerto Azul Beach Hotel and Resort Complex were not
claimed by PALI as its assets. On the contrary, the resort is actually owned by Fantasia Filipina Resort, Inc. and
the Puerto Azul Country Club, entities distinct from PALI. Furthermore, the Ternate Development Corporation owns
only 1.20% of PALI. The Marcoses responded that their claim is not confined to the facilities forming part of the
Puerto Azul Hotel and Resort Complex, thereby implying that they are also asserting legal and beneficial
ownership of other properties titled under the name of PALI.
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On February 20, 1996, the PSE wrote Chairman Magtanggol Gunigundo of the Presidential Commission on Good
Government (PCGG) requesting for comments on the letters of the PALI and the Marcoses. On March 4, 1996, the
PSE was informed that the Marcoses received a Temporary Restraining Order on the same date, enjoining the
Marcoses from, among others, "further impeding, obstructing, delaying or interfering in any manner by or any
means with the consideration, processing and approval by the PSE of the initial public offering of PALI." The TRO
was issued by Judge Martin S. Villarama, Executive Judge of the RTC of Pasig City in Civil Case No. 65561,
pending in Branch 69 thereof.
In its regular meeting held on March 27, 1996, the Board of Governors of the PSE reached its decision to reject
PALI's application, citing the existence of serious claims, issues and circumstances surrounding PALI's ownership
over its assets that adversely affect the suitability of listing PALI's shares in the stock exchange.
On April 11, 1996, PALI wrote a letter to the SEC addressed to the then Acting Chairman, Perfecto R. Yasay, Jr.,
bringing to the SEC's attention the action taken by the PSE in the application of PALI for the listing of its shares
with the PSE, and requesting that the SEC, in the exercise of its supervisory and regulatory powers over stock
exchanges under Section 6(j) of P.D. No. 902-A, review the PSE's action on PALI's listing application and institute
such measures as are just and proper under the circumstances.
WHEREFORE, premises considered, the Commission finds no compelling reason to
reconsider its order dated April 24, 1996, and in the light of recent developments on the
adverse claim against the PALI properties, PSE should require PALI to submit full disclosure of
material facts and information to protect the investing public. In this regard, PALI is hereby
ordered to amend its registration statements filed with the Commission to incorporate the full
disclosure of these material facts and information.
Dissatisfied with this ruling, the PSE filed with the Court of Appeals on May 17, 1996 a Petition for Review (with
Application for Writ of Preliminary Injunction and Temporary Restraining Order), assailing the above mentioned
orders of the SEC, submitting the following as errors of the SEC:
I. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF
DISCRETION IN ISSUING THE ASSAILED ORDERS WITHOUT
POWER, JURISDICTION, OR AUTHORITY; SEC HAS NO POWER TO
ORDER THE LISTING AND SALE OF SHARES OF PALI WHOSE
ASSETS ARE SEQUESTERED AND TO REVIEW AND SUBSTITUTE
DECISIONS OF PSE ON LISTING APPLICATIONS;

On the same date, or on April 11, 1996, the SEC wrote to the PSE, attaching thereto the letter of PALI and directing
the PSE to file its comments thereto within five days from its receipt and for its authorized representative to appear
for an "inquiry" on the matter. On April 22, 1996, the PSE submitted a letter to the SEC containing its comments to
the April 11, 1996 letter of PALI.
On April 24, 1996, the SEC rendered its Order, reversing the PSE's decision. The dispositive portion of the said
order reads:
WHEREFORE, premises considered, and invoking the Commissioner's authority and
jurisdiction under Section 3 of the Revised Securities Act, in conjunction with Section 3, 6(j)
and 6(m) of Presidential Decree No. 902-A, the decision of the Board of Governors of the
Philippine Stock Exchange denying the listing of shares of Puerto Azul Land, Inc., is hereby
set aside, and the PSE is hereby ordered to immediately cause the listing of the PALI shares
in the Exchange, without prejudice to its authority to require PALI to disclose such other
material information it deems necessary for the protection of the investigating public.
This Order shall take effect immediately.
SO ORDERED.
II. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF
DISCRETION IN FINDING THAT PSE ACTED IN AN ARBITRARY AND
ABUSIVE MANNER IN DISAPPROVING PALI'S LISTING APPLICATION;
III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL AND VOID FOR
ALLOWING FURTHER DISPOSITION OF PROPERTIES IN CUSTODIA
LEGIS AND WHICH FORM PART OF NAVAL/MILITARY RESERVATION;
AND
IV. THE FULL DISCLOSURE OF THE SEC WAS NOT PROPERLY
PROMULGATED AND ITS IMPLEMENTATION AND APPLICATION IN
THIS CASE VIOLATES THE DUE PROCESS CLAUSE OF THE
CONSTITUTION.
On June 4, 1996, PALI filed its Comment to the Petition for Review and subsequently, a Comment and Motion to
Dismiss. On June 10, 1996, PSE fled its Reply to Comment and Opposition to Motion to Dismiss.
On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing the PSE's Petition for Review.
Hence, this Petition by the PSE.

PSE filed a motion for reconsideration of the said order on April 29, 1996, which was, however denied by the The appellate court had ruled that the SEC had both jurisdiction and authority to look into the decision of the
Commission in its May 9, 1996 Order which states: petitioner PSE, pursuant to Section 3 3 of the Revised Securities Act in relation to Section 6(j) and 6(m) 4 of P.D.
No. 902-A, and Section 38(b)5 of the Revised Securities Act, and for the purpose of ensuring fair administration of
the exchange. Both as a corporation and as a stock exchange, the petitioner is subject to public respondent's

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jurisdiction, regulation and control. Accepting the argument that the public respondent has the authority merely to
supervise or regulate, would amount to serious consequences, considering that the petitioner is a stock exchange
whose business is impressed with public interest. Abuse is not remote if the public respondent is left without any
system of control. If the securities act vested the public respondent with jurisdiction and control over all
corporations; the power to authorize the establishment of stock exchanges; the right to supervise and regulate the
same; and the power to alter and supplement rules of the exchange in the listing or delisting of securities, then the
law certainly granted to the public respondent the plenary authority over the petitioner; and the power of review
necessarily comes within its authority.
All in all, the court held that PALI complied with all the requirements for public listing, affirming the SEC's ruling to
the effect that:
. . . the Philippine Stock Exchange has acted in an arbitrary and abusive manner in
disapproving the application of PALI for listing of its shares in the face of the following
considerations:
1. PALI has clearly and admittedly complied with the Listing Rules and full disclosure
requirements of the Exchange;
2. In applying its clear and reasonable standards on the suitability for listing of shares, PSE
has failed to justify why it acted differently on the application of PALI, as compared to the IPOs
of other companies similarly situated that were allowed listing in the Exchange;
3. It appears that the claims and issues on the title to PALI's properties were even less serious
than the claims against the assets of the other companies in that, the assertions of the
Marcoses that they are owners of the disputed properties were not substantiated enough to
overcome the strength of a title to properties issued under the Torrens System as evidence of
ownership thereof;
4. No action has been filed in any court of competent jurisdiction seeking to nullify PALI's
ownership over the disputed properties, neither has the government instituted recovery
proceedings against these properties. Yet the import of PSE's decision in denying PALI's
application is that it would be PALI, not the Marcoses, that must go to court to prove the
legality of its ownership on these properties before its shares can be listed.
In addition, the argument that the PALI properties belong to the Military/Naval Reservation does not inspire belief.
The point is, the PALI properties are now titled. A property losses its public character the moment it is covered by a
title. As a matter of fact, the titles have long been settled by a final judgment; and the final decree having been
registered, they can no longer be re-opened considering that the one year period has already passed. Lastly, the
determination of what standard to apply in allowing PALI's application for listing, whether the discretion method or
the system of public disclosure adhered to by the SEC, should be addressed to the Securities Commission, it
being the government agency that exercises both supervisory and regulatory authority over all corporations.
On August 15, 19961 the PSE, after it was granted an extension, filed the instant Petition for Review on Certiorari,
taking exception to the rulings of the SEC and the Court of Appeals. Respondent PALI filed its Comment to the
petition on October 17, 1996. On the same date, the PCGG filed a Motion for Leave to file a Petition for
Intervention. This was followed up by the PCGG's Petition for Intervention on October 21, 1996. A supplemental
Comment was filed by PALI on October 25, 1997. The Office of the Solicitor General, representing the SEC and
the Court of Appeals, likewise filed its Comment on December 26, 1996. In answer to the PCGG's motion for leave
to file petition for intervention, PALI filed its Comment thereto on January 17, 1997, whereas the PSE filed its own
Comment on January 20, 1997.
On February 25, 1996, the PSE filed its Consolidated Reply to the comments of respondent PALI (October 17,
1996) and the Solicitor General (December 26, 1996). On May 16, 1997, PALI filed its Rejoinder to the said
consolidated reply of PSE.
PSE submits that the Court of Appeals erred in ruling that the SEC had authority to order the PSE to list the shares
of PALI in the stock exchange. Under presidential decree No. 902-A, the powers of the SEC over stock exchanges
are more limited as compared to its authority over ordinary corporations. In connection with this, the powers of the
SEC over stock exchanges under the Revised Securities Act are specifically enumerated, and these do not include
the power to reverse the decisions of the stock exchange. Authorities are in abundance even in the United States,
from which the country's security policies are patterned, to the effect of giving the Securities Commission less
control over stock exchanges, which in turn are given more lee-way in making the decision whether or not to allow
corporations to offer their stock to the public through the stock exchange. This is in accord with the "business
judgment rule" whereby the SEC and the courts are barred from intruding into business judgments of corporations,
when the same are made in good faith. the said rule precludes the reversal of the decision of the PSE to deny
PALI's listing application, absent a showing of bad faith on the part of the PSE. Under the listing rules of the PSE,
to which PALI had previously agreed to comply, the PSE retains the discretion to accept or reject applications for
listing. Thus, even if an issuer has complied with the PSE listing rules and requirements, PSE retains the discretion
to accept or reject the issuer's listing application if the PSE determines that the listing shall not serve the interests
of the investing public.
Moreover, PSE argues that the SEC has no jurisdiction over sequestered corporations, nor with corporations
whose properties are under sequestration. A reading of Republic of the Philippines vs. Sadiganbayan, G.R. No.
105205, 240 SCRA 376, would reveal that the properties of PALI, which were derived from the Ternate
Development Corporation (TDC) and the Monte del Sol Development Corporation (MSDC). are under
sequestration by the PCGG, and subject of forfeiture proceedings in the Sandiganbayan. This ruling of the Court is
the "law of the case" between the Republic and TDC and MSDC. It categorically declares that the assets of these
corporations were sequestered by the PCGG on March 10, 1986 and April 4, 1988.
It is, likewise, intimated that the Court of Appeals' sanction that PALI's ownership over its properties can no longer
be questioned, since certificates of title have been issued to PALI and more than one year has since lapsed, is
erroneous and ignores well settled jurisprudence on land titles. That a certificate of title issued under the Torrens
System is a conclusive evidence of ownership is not an absolute rule and admits certain exceptions. It is
fundamental that forest lands or military reservations are non-alienable. Thus, when a title covers a forest reserve
or a government reservation, such title is void.
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PSE, likewise, assails the SEC's and the Court of Appeals reliance on the alleged policy of "full disclosure" to
uphold the listing of PALI's shares with the PSE, in the absence of a clear mandate for the effectivity of such policy.
As it is, the case records reveal the truth that PALI did not comply with the listing rules and disclosure
requirements. In fact, PALI's documents supporting its application contained misrepresentations and misleading
statements, and concealed material information. The matter of sequestration of PALI's properties and the fact that
the same form part of military/naval/forest reservations were not reflected in PALI's application.
It is undeniable that the petitioner PSE is not an ordinary corporation, in that although it is clothed with the
markings of a corporate entity, it functions as the primary channel through which the vessels of capital trade ply.
The PSE's relevance to the continued operation and filtration of the securities transactions in the country gives it a
distinct color of importance such that government intervention in its affairs becomes justified, if not necessarily.
Indeed, as the only operational stock exchange in the country today, the PSE enjoys a monopoly of securities
transactions, and as such, it yields an immense influence upon the country's economy.
Due to this special nature of stock exchanges, the country's lawmakers has seen it wise to give special treatment
to the administration and regulation of stock exchanges. 6
These provisions, read together with the general grant of jurisdiction, and right of supervision and control over all
corporations under Sec. 3 of P.D. 902-A, give the SEC the special mandate to be vigilant in the supervision of the
affairs of stock exchanges so that the interests of the investing public may be fully safeguard.
Section 3 of Presidential Decree 902-A, standing alone, is enough authority to uphold the SEC's challenged control
authority over the petitioner PSE even as it provides that "the Commission shall have absolute jurisdiction,
supervision, and control over all corporations, partnerships or associations, who are the grantees of primary
franchises and/or a license or permit issued by the government to operate in the Philippines. . ." The SEC's
regulatory authority over private corporations encompasses a wide margin of areas, touching nearly all of a
corporation's concerns. This authority springs from the fact that a corporation owes its existence to the concession
of its corporate franchise from the state.
The SEC's power to look into the subject ruling of the PSE, therefore, may be implied from or be considered as
necessary or incidental to the carrying out of the SEC's express power to insure fair dealing in securities traded
upon a stock exchange or to ensure the fair administration of such exchange. 7 It is, likewise, observed that the
principal function of the SEC is the supervision and control over corporations, partnerships and associations with
the end in view that investment in these entities may be encouraged and protected, and their activities for the
promotion of economic development. 8
Thus, it was in the alleged exercise of this authority that the SEC reversed the decision of the PSE to deny the
application for listing in the stock exchange of the private respondent PALI. The SEC's action was affirmed by the
Court of Appeals.
We affirm that the SEC is the entity with the primary say as to whether or not securities, including shares of stock
of a corporation, may be traded or not in the stock exchange. This is in line with the SEC's mission to ensure
proper compliance with the laws, such as the Revised Securities Act and to regulate the sale and disposition of
securities in the country. 9 As the appellate court explains:
Paramount policy also supports the authority of the public respondent to review petitioner's
denial of the listing. Being a stock exchange, the petitioner performs a function that is vital to
the national economy, as the business is affected with public interest. As a matter of fact, it has
often been said that the economy moves on the basis of the rise and fall of stocks being
traded. By its economic power, the petitioner certainly can dictate which and how many users
are allowed to sell securities thru the facilities of a stock exchange, if allowed to interpret its
own rules liberally as it may please. Petitioner can either allow or deny the entry to the market
of securities. To repeat, the monopoly, unless accompanied by control, becomes subject to
abuse; hence, considering public interest, then it should be subject to government regulation.
The role of the SEC in our national economy cannot be minimized. The legislature, through the Revised Securities
Act, Presidential Decree No. 902-A, and other pertinent laws, has entrusted to it the serious responsibility of
enforcing all laws affecting corporations and other forms of associations not otherwise vested in some other
government office. 10
This is not to say, however, that the PSE's management prerogatives are under the absolute control of the SEC.
The PSE is, alter all, a corporation authorized by its corporate franchise to engage in its proposed and duly
approved business. One of the PSE's main concerns, as such, is still the generation of profit for its stockholders.
Moreover, the PSE has all the rights pertaining to corporations, including the right to sue and be sued, to hold
property in its own name, to enter (or not to enter) into contracts with third persons, and to perform all other legal
acts within its allocated express or implied powers.
A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with
a distinct legal personality. In organizing itself as a collective body, it waives no constitutional immunities and
perquisites appropriate to such a body. 11 As to its corporate and management decisions, therefore, the state will
generally not interfere with the same. Questions of policy and of management are left to the honest decision of the
officers and directors of a corporation, and the courts are without authority to substitute their judgment for the
judgment of the board of directors. The board is the business manager of the corporation, and so long as it acts in
good faith, its orders are not reviewable by the courts. 12
Thus, notwithstanding the regulatory power of the SEC over the PSE, and the resultant authority to reverse the
PSE's decision in matters of application for listing in the market, the SEC may exercise such power only if the
PSE's judgment is attended by bad faith. In Board of Liquidators vs. Kalaw,13 it was held that bad faith does not
simply connote bad judgment or negligence. It imports a dishonest purpose or some moral obliquity and conscious
doing of wrong. It means a breach of a known duty through some motive or interest of ill will, partaking of the
nature of fraud.
In reaching its decision to deny the application for listing of PALI, the PSE considered important facts, which, in the
general scheme, brings to serious question the qualification of PALI to sell its shares to the public through the
stock exchange. During the time for receiving objections to the application, the PSE heard from the representative
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of the late President Ferdinand E. Marcos and his family who claim the properties of the private respondent to be
part of the Marcos estate. In time, the PCGG confirmed this claim. In fact, an order of sequestration has been
issued covering the properties of PALI, and suit for reconveyance to the state has been filed in the Sandiganbayan
Court. How the properties were effectively transferred, despite the sequestration order, from the TDC and MSDC to
Rebecco Panlilio, and to the private respondent PALI, in only a short span of time, are not yet explained to the
Court, but it is clear that such circumstances give rise to serious doubt as to the integrity of PALI as a stock issuer.
The petitioner was in the right when it refused application of PALI, for a contrary ruling was not to the best interest
of the general public. The purpose of the Revised Securities Act, after all, is to give adequate and effective
protection to the investing public against fraudulent representations, or false promises, and the imposition of
worthless ventures. 14
It is to be observed that the U.S. Securities Act emphasized its avowed protection to acts detrimental to legitimate
business, thus:
The Securities Act, often referred to as the "truth in securities" Act, was designed not only to
provide investors with adequate information upon which to base their decisions to buy and sell
securities, but also to protect legitimate business seeking to obtain capital through honest
presentation against competition from crooked promoters and to prevent fraud in the sale of
securities. (Tenth Annual Report, U.S. Securities & Exchange Commission, p. 14).
As has been pointed out, the effects of such an act are chiefly (1) prevention of excesses and
fraudulent transactions, merely by requirement of that their details be revealed; (2) placing the
market during the early stages of the offering of a security a body of information, which
operating indirectly through investment services and expert investors, will tend to produce a
more accurate appraisal of a security, . . . Thus, the Commission may refuse to permit a
registration statement to become effective if it appears on its face to be incomplete or
inaccurate in any material respect, and empower the Commission to issue a stop order
suspending the effectiveness of any registration statement which is found to include any
untrue statement of a material fact or to omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading. (Idem).
Also, as the primary market for securities, the PSE has established its name and goodwill, and it has the right to
protect such goodwill by maintaining a reasonable standard of propriety in the entities who choose to transact
through its facilities. It was reasonable for the PSE, therefore, to exercise its judgment in the manner it deems
appropriate for its business identity, as long as no rights are trampled upon, and public welfare is safeguarded.
In this connection, it is proper to observe that the concept of government absolutism is a thing of the past, and
should remain so.
The observation that the title of PALI over its properties is absolute and can no longer be assailed is of no moment.
At this juncture, there is the claim that the properties were owned by TDC and MSDC and were transferred in
violation of sequestration orders, to Rebecco Panlilio and later on to PALI, besides the claim of the Marcoses that
such properties belong to the Marcos estate, and were held only in trust by Rebecco Panlilio. It is also alleged by
the petitioner that these properties belong to naval and forest reserves, and therefore beyond private dominion. If
any of these claims is established to be true, the certificates of title over the subject properties now held by PALI
map be disregarded, as it is an established rule that a registration of a certificate of title does not confer ownership
over the properties described therein to the person named as owner. The inscription in the registry, to be effective,
must be made in good faith. The defense of indefeasibility of a Torrens Title does not extend to a transferee who
takes the certificate of title with notice of a flaw.
In any case, for the purpose of determining whether PSE acted correctly in refusing the application of PALI, the
true ownership of the properties of PALI need not be determined as an absolute fact. What is material is that the
uncertainty of the properties' ownership and alienability exists, and this puts to question the qualification of PALI's
public offering. In sum, the Court finds that the SEC had acted arbitrarily in arrogating unto itself the discretion of
approving the application for listing in the PSE of the private respondent PALI, since this is a matter addressed to
the sound discretion of the PSE, a corporation entity, whose business judgments are respected in the absence of
bad faith.
The question as to what policy is, or should be relied upon in approving the registration and sale of securities in the
SEC is not for the Court to determine, but is left to the sound discretion of the Securities and Exchange
Commission. In mandating the SEC to administer the Revised Securities Act, and in performing its other functions
under pertinent laws, the Revised Securities Act, under Section 3 thereof, gives the SEC the power to promulgate
such rules and regulations as it may consider appropriate in the public interest for the enforcement of the said
laws. The second paragraph of Section 4 of the said law, on the other hand, provides that no security, unless
exempt by law, shall be issued, endorsed, sold, transferred or in any other manner conveyed to the public, unless
registered in accordance with the rules and regulations that shall be promulgated in the public interest and for the
protection of investors by the Commission. Presidential Decree No. 902-A, on the other hand, provides that the
SEC, as regulatory agency, has supervision and control over all corporations and over the securities market as a
whole, and as such, is given ample authority in determining appropriate policies. Pursuant to this regulatory
authority, the SEC has manifested that it has adopted the policy of "full material disclosure" where all companies,
listed or applying for listing, are required to divulge truthfully and accurately, all material information about
themselves and the securities they sell, for the protection of the investing public, and under pain of administrative,
criminal and civil sanctions. In connection with this, a fact is deemed material if it tends to induce or otherwise
effect the sale or purchase of its securities. 15 While the employment of this policy is recognized and sanctioned by
the laws, nonetheless, the Revised Securities Act sets substantial and procedural standards which a proposed
issuer of securities must satisfy. 16 Pertinently, Section 9 of the Revised Securities Act sets forth the
possible Grounds for the Rejection of the registration of a security:
— The Commission may reject a registration statement and refuse to issue a permit to sell the
securities included in such registration statement if it finds that —
(1) The registration statement is on its face incomplete or inaccurate in any material respect or
includes any untrue statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading; or
(2) The issuer or registrant —
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(i) is not solvent or not in sound financial condition;
(ii) has violated or has not complied with the provisions of this Act, or the
rules promulgated pursuant thereto, or any order of the Commission;
(iii) has failed to comply with any of the applicable requirements and
conditions that the Commission may, in the public interest and for the
protection of investors, impose before the security can be registered;
In resume, the Court finds that the PSE has acted with justified circumspection, discounting, therefore, any
imputation of arbitrariness and whimsical animation on its part. Its action in refusing to allow the listing of PALI in
the stock exchange is justified by the law and by the circumstances attendant to this case.
ACCORDINGLY, in view of the foregoing considerations, the Court hereby GRANTS the Petition for Review
on Certiorari. The Decisions of the Court of Appeals and the Securities and Exchange Commission dated July 27,
1996 and April 24, 1996 respectively, are hereby REVERSED and SET ASIDE, and a new Judgment is hereby
ENTERED, affirming the decision of the Philippine Stock Exchange to deny the application for listing of the private
respondent Puerto Azul Land, Inc.

(iv) has been engaged or is engaged or is about to engage in fraudulent

transaction;

(v) is in any way dishonest or is not of good repute; or

(vi) does not conduct its business in accordance with law or is engaged in
a business that is illegal or contrary to government rules and regulations.

(3) The enterprise or the business of the issuer is not shown to be sound or to be based on
sound business principles;

(4) An officer, member of the board of directors, or principal stockholder of the issuer is
disqualified to be such officer, director or principal stockholder; or

(5) The issuer or registrant has not shown to the satisfaction of the Commission that the sale
of its security would not work to the prejudice of the public interest or as a fraud upon the
purchasers or investors. (Emphasis Ours)

A reading of the foregoing grounds reveals the intention of the lawmakers to make the registration and issuance of
securities dependent, to a certain extent, on the merits of the securities themselves, and of the issuer, to be
determined by the Securities and Exchange Commission. This measure was meant to protect the interests of the
investing public against fraudulent and worthless securities, and the SEC is mandated by law to safeguard these
interests, following the policies and rules therefore provided. The absolute reliance on the full disclosure method in
the registration of securities is, therefore, untenable. As it is, the Court finds that the private respondent PALI, on at
least two points (nos. 1 and 5) has failed to support the propriety of the issue of its shares with unfailing clarity,
thereby lending support to the conclusion that the PSE acted correctly in refusing the listing of PALI in its stock
exchange. This does not discount the effectivity of whatever method the SEC, in the exercise of its vested
authority, chooses in setting the standard for public offerings of corporations wishing to do so. However, the SEC
must recognize and implement the mandate of the law, particularly the Revised Securities Act, the provisions of
which cannot be amended or supplanted by mere administrative issuance.

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